Guest Post: The Wolf In Sheep's Clothing

Tyler Durden's picture

Submitted by Nicholas Bucheleres of NJBDeflator blog,

Let's call the collection of investors and traders that have been ceaselessly squabbling over the Fed's policy decisions, card players, and let's call Bernanke, the dealer.  Throughout this summer and fall, investors have been playing cards against a guarded Bernanke, until September 14's FOMC meeting wherein Uncle Ben slated the Fed to purchase an additional $40billion in agency mortgage-backed securities (MBS) per month (increasing total monthly agency MBS purchases to $85billion).  Despite all counter-arguments and despite the fact that central banking is going even beyond unchartered waters, it is now clear that the dealer is being forced to show his hand.

These days every pundit and his barber are suddenly central banking gurus and monetary transmission mechanism experts, but while some of them may have an educated guess as to the reality of the matters at hand, none can envisage that which the Fed is able to.  What is almost never considered by most wanna-bees  is that no one in the world has access to as many economic and financial data sets, metrics, and indicators, and the synthesis thereof, as the United States Federal Reserve.  Ben may make mistakes, but he is no fool.  When he acts, he either sees present reason to do so, or he is bracing for a future shock. 

A famous guy named Socrates from the 400s (BC, that is) once said,

"As for me, all I know is that I know nothing."

Although already agreed upon by the Fed, claims against the pursuance of further monetary action are numerous, and the argument that it fails to ignite the real economy has been proven correct in recent history.  The Dallas Federal Reserve President Richard Fisher, who is a non-voting member of the FOMC, has been one of the most reputable and vocal dissenters of further Fed balance sheet expansion:

  • The United States currently faces no immediate threat of deflation, which was the implicit prospectus of the post-Great Depression US central banking system.  Inflation is slightly below where Bernanke wants it, and, in fact, longer-term inflation expectations have been rising.  Oh yeah, and this summer's drought inflated corn and soybean prices by ~50% and ~35% respectively.  Inflation will undoubtedly rear its head sooner or later; deflation is far less likely.
  • Mortgage rates must be holding people back from purchasing new homes, right?  Not quite.  Mortgages are currently at their lowest rates ever.  Will a couple fewer basis points really matter?
  • "Well, I'd start a small business if..."  Sorry, pal, that's still not an excuse to live with your mom and her 12 cats.  Labor and business survey data empirically show that 9-out-of-10 small and medium sized businesses are not interested in borrowing, or have credit readily available to them.  
  • US equity indices are setting 4+ year highs and are just shy of clearing all-time highs and US corporations are flushed with cash.

There is an obvious dissonance between the above metrics and the Fed's decision to further prop up the economy but, let's get back to the card game:

That the Fed has enacted another round of easing, even though many of the economic indicators it aims to improve are either robust or have clearly not been effected by recent rounds of liquidity, should be troubling.  It means that the Fed foresees imminent headwinds that would be disastrous to our economy in its current state.  Maybe Richard Fisher can put it more eloquently than I can.  Take it away, Dick.

Nobody on the committee, nor on our staffs at the Board of Governors and the 12 [Federal Reserve] banks, really knows what is holding back the economy.  Nobody really knows what will work to get the economy back on course.

Sobering words from Richard Fisher; Bernanke has recently been speaking to the notion of helplessness, also.

If we want our questions about the economy answered, we should look Bernanke's  recent move to intuit an idea of the cards he is playing with.  There are disconnects between what is considered the common knowledge of investors, and the behavior of the Fed.  This move gave Bernanke's hand away, and it is becoming clear that negative developments around the world (some yet to come to fruition) are cornering Bernanke and forcing him to come to terms with his inability to provide the panacea again.  The god-like powers of central banking are being questioned, and maybe Bernanke's 2008 silver-bullet should have been a one-off.

Has the writing on the walls faded since 2008?  Have we not figured out that whenever the Fed acts, things are either really bad, or are on the way there?  Further than that, have we not figured out that the Fed cannot carry the entire economy on its balance-sheet?  Do I even need to sarcastically say, "This time it's different!"?  Bernanke is not a chump--he is well aware of the short-comings of recent Fed activity and their limited effects going forward.  It is quite clear at this point that Ben is pulling his nose out of the textbook and is beginning to act out of last resort.  This last resort scenario is confirmed by his preemptive strike and implies that Ben, who has it from the best data in the world, thinks that this economy needs to return to "trend" as quickly as possible in order to weather near-term storms.

An important (and I believe severely under-appreciated) tenant of Bernanke's FOMC stance was his response to a question by a journalist after his speech.  His response gave coy indication of his implicit goal to elevate the United States economy to a level of momentum which would allow it to overcome future (unspecified) headwinds.  Which headwinds might those be?

  • A ballooning $1trillion student-debt load in the United States
  • The proverbial "Fiscal Cliff"
  • Cracks in the euro zone deepening
  • Middle-East turmoil disrupting trade routes, specifically oil
  • A sudden deterioration in an already crumbling Chinese economy

...and the list goes on.  Bernanke is king-of-the-data-hill and it is more than likely that he is privy to negative developments in one or more of the risks facing the US economy that even the most savvy bank economists cannot or may not see.

Despite entropy from within its own entity, the Federal Reserve is at it once again.  This time, we have recent history to act as reference, which is not very encouraging.  For many reasons, some aforementioned, the United States economy is clearly not amenable to Fed balance-sheet expansion anymore, yet, despite dissent and all, the members of the Federal Reserve's Federal Open Markets agreed on September 14th to increase their monthly purchases.

This last resort scenario is not just isolated to the United States and the Federal Reserve.  The ECB, the Bank of Japan, and the Bank of England are of the most notable "easers" of the last couple weeks.  The cases for and against their monetary accommodation are beyond the scope of this article, but the takeaway is the same: central bankers around the world are grasping at straws.

It is a matter of time before markets lose complete faith in the recklessness of central planning Ponzi artists, and this reality is self-evident through the late-summer/early-fall hope-rally.

 

 

S&P500 (white) & Dow Jones Transportation sub-sector (blue) over two years.

One of the withstanding pillars of Dow Theory is the notion that market extremes are determined by comparing extremes in the Dow Jones Transportation sub-sector and extremes in the broader equity market.  As is clear above, the S&P is a nudge below all-time highs while the Dow Transportation sector continues to set lows of longer time horizons.  According to the century old Dow Theory, and among a plethora of other reasons, it might be time to reconsider the beta of your portfolio. 

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CPL's picture

I drank what?

Socrates

Zer0head's picture

If you like Stern

 

this is classic from last week

http://www.youtube.com/watch?v=SeJbOU4nmHQ

AlaricBalth's picture

" Ben may make mistakes, but he is no fool."
The writer is correct. Ben is not a fool. He is "an errand boy, sent by grocery clerks, to collect a bill. "

Colonel Kurtz from Apocalypse Now:
http://www.hark.com/clips/lcpkndyrcd-youre-an-errand-boy

SafelyGraze's picture

if the immediate goal of qe:mbs40 is to increase inflation expectations, maybe the Nank earned his paycheck

markmotive's picture

Perhaps this is all part of a master plan.

Ben Swann's History of Bernanke's Failures: http://www.planbeconomics.com/2012/09/24/want-ben-swanns-history-of-bern...

Kind of seems too frequent to be out of sheer stupidity. Wanton disregard perhaps?

DeadFred's picture

Ben may say he want to raise inflation expectations but what he's really after is the things he expects to come out of those increased expectations, things like increased investment and risk taking on the hiring front. If he wiggles expectations without solving the underlying issues he's unlikely to get his desired results. He'll only get his unintended consequences, those never fail to show up.

stocktivity's picture

Bernanke is king-of-the-data-hill and it is more than likely that he is privy to negative developments in one or more of the risks facing the US economy that even the most savvy bank economists cannot or may not see.

Well then...he's not too savvy....back in 2007, Benny said subprime was "contained".  It's all Bullshit!

Deo vindice's picture

You know ... sometimes bankers just outright lie.

Just sayin'...

elementary's picture

They only lie in Europe and only when they really have to.

goldfish1's picture

"Bernanke is not a chump..."

Lesser minds differ.

RacerX's picture

Sadly that is probably representative of a large part of the electorate. Funny that Stern would goof on the Dems though. Good for him for putting it out in the open.

Funny clip. Thanks for posting.

Bear's picture

Obama voters, you gota love em

Cloud9.5's picture

Anybody ever read the Bell Curve?

Offthebeach's picture

I watched when it came out on DVD.

Dead Canary's picture

<edit>  Double click brain fart.

The Malamute Kid's picture

I always thought it was Sgt Schultz that said "I know nothing" circa 1964

LudwigVon's picture

September 14's FOMC meeting wherein Uncle Ben slated the Fed to purchase an additional $40billion in agency mortgage-backed securities (MBS) per month (increasing total monthly agency MBS purchases to $85billion).

FAIL.

NEITHER pundit NOR barber.

How can none of you catch this? Since when is the Bernak buying $85b/mo in MBS??

Even with the income being reinvested, roughly $10b/a mo., and the unsterilized OT2 bond buying amounting to $26b in 2012, or roughly $3b/mo., still can't get you to the Bill-Gross-Wet-Panties scenario of $85b/mo in MBS. 

Even if we assumed the Bernak will announce that he will buy an equal amount of long-bonds as he is presently for OT2, ~$45b/mo., until labor conditions show significant improvement, after the OT2 program ends year-end 2012 (as everyone but the author knows, the Fed is out of short-term paper to sell right about then anyway), bonds are still not MBS! It would be like 53b / 45b a mo, MBS/long-bonds.

Perhaps we should be more careful to throw out: "sudden central banking guru and monetary transmission mechanism expert."

kito's picture

Let's call the collection of investors and traders that have been ceaselessly squabbling over the Fed's policy decisions, card players, and let's call Bernanke, the dealer....

 

yes, its gambling-not with chips-but with the lives of billions of people.........................

Go Tribe's picture

Or...maybe Bernanke's just dumb. Would be a much cleaner explanation.

Dr.Engineer's picture

Occam's razor works for science ...

Nuff said

Zwelgje's picture

Bernanke dumb? Dumb folk never get far. He did.

No, just employed by criminals. Now that's simple.

CPL's picture

Seconded, sometime job inheritance sucks and you have no choice but to agree with the policies of the last loon.  Greenspan sat in the captains chair for a loooooong time.

davidsmith's picture

Does anyone have even the slightest clue as to why ZH keeps posting articles by ignorant clods?  I mean, is this the best this site can do?  Williams just a few hours ago contradicted this nonsense:

 

"Bernanke is not a chump--he is well aware of the short-comings of recent Fed activity and their limited effects going forward.  It is quite clear at this point that Ben is pulling his nose out of the textbook and is beginning to act out of last resort.  This last resort scenario is confirmed by his preemptive strike and implies that Ben, who has it from the best data in the world, thinks that this economy needs to return to "trend" as quickly as possible in order to weather near-term storms. "

 

What last resort is this chump talking about?  There are still trillions of dollars to be stolen from middle class people, and if there is something in the Fed's official mandate which prevents it from buying student loans and consumer debt, as well as propping up pension plans, then some new instrument will be invented to facilitate that. John Williams JUST said as much.  So this article is not only wrong, it is also dated.

 

And to show just what an ignorant dog this author is, check this out:

 

"An important (and I believe severely under-appreciated) tenant of Bernanke's FOMC stance was his response to a question by a journalist after his speech."

 

The word is "tenet."  This silly ass goon doesn't even know the English language.  Christ, ZH, give me a fucking break!!  This site is turning into a cartoon novel.  What a bunch of dogs! 

Bear's picture

I am still trying to understand your point

kito's picture

actually davidsmith, thanks to bernanke and his ilk, most of the countrys citizens are becoming tenants under his FOMC stance......................speaking of proper grammar, you do realize there is a space needed between first and last names????....for example.....david smith...............

Deo vindice's picture

Or, maybe the space is in the wrong place, an apostrophe was missed and the last name spelled wrong.

Maybe it is really David's Myth.

Deo vindice's picture

To the person who down arrowed my comment -

You really need to get a sense of humour. Really. It will be of great benefit in all the insanity of a mad world.

earleflorida's picture

You should be proud Deo,... tis but,"A Red Badge of Courage"-- to piss someone off for what you feel was a nobleman's  `Speak'!

yourfather's picture

markets are voting mechanisms.

voting requires opinions.

therefore to function markets require opinions, buy or sell, produce, don't produce, consume don't consume.

Part of actually being involved in the market as an informed participant (as opposed to a stupid consumer) is understanding the other side of the trade.

Therefore ZH should be like a supermarket of opinions, and you just choose the one you want to support.

Do you get angry at Vons or Woolworths or whatever for selling a breakfast cereal you don't want to eat?

Then why rage against a free blog for posting an opinion you don't need to subscribe to.

Vint Slugs's picture

@davidsmith

I give you a green arrow.  Functionally illiterate dorks like earleflorida fail to realize that they couldn't even log into ZH unless they spell their user names and passwords "purrflect"-ly and posters like bear with a second grade reading comprehension are forever "trying to understand" someone's point.

LudwigVon's picture

Yeah a "fuckin cartoon novel." lol, agreed.

What "last resort" is this chump talking about?

It is quite clear at this point that Ben is pulling his nose out of the textbook and is beginning to act out of last resort.  This last resort scenario is confirmed by his preemptive strike

You mean first resort? Isn't expanding the supply of currency and credit all an exponentially derived monetary system owner does... like, by default? Or did you mean qualitative easing, that was the first resort, you are right. Where the central bank reduces the collateral requirements - reducing the "quality." 

So the last resort, pined over for years with NGDP, price-level and employment-level targeting, and formalized in policy prescription months and months ago when Goldman explained to everybody how the stock argument would soon move to flow for gaining incremental price manipulation. I would argue that the flow rate can be turned up notably, status-quo-philia & normalcy bias leans hard on logic. So how is that his last resort?

Even if it is his last resort, as unlimited logically means the ponzi end-game is neigh, and rate of flow is simply like arguing just how dead something is, it may not mean this is a preemptive strike. A you state, "when he acts, he either sees present reason to do so, or he is bracing for a future shock." So could it be that he is not bracing, but sees present reason to do so?

Such as cash-flow needs at TBTF, clearing away stank MBS in exchange for cash? There was "only" a handful of billions in repo right around the QE3 announcement, perhaps a bridge? Lastly, why couldn't the Bernak have seen the deflationary run-rate of $50/mo, and decide that his $10b/mo max in MBS reinvestments needed another friendly $40b /mo to help offset the bleeding. Bernak likely saw that this rate of implosion in private credit could increase near winter - and he can then announce unsterilized monetization and you will get your precious 85.

85. 85. I saw the # for days in the media, sadly not at all limited to MSM... For something so important as modern-slavery, you could at least get it fucking right.

yourfather's picture

yeah one thing that concerns me is the quality of collateral for all these assets that the CB's are purchasing.

I mean if it was like a Greek Island or residences of diplomats in London, then I wouldn't mind having that on

Peter Pan's picture

You are free to make any comment you wish, but naming others "silly asses" or "ignorant dog" detracts from the points you wish to make.

My view is that Bernanke does in fact have access to many tools, facts and figures, but what eludes him is a winning recipe or perhaps the realisation that there is in fact no winning recipe.

The only recipe, bitter as it may be, is the freedom of the market to work its axe and its magic.

orangedrinkandchips's picture

ZH is a fair, freedom rich site so if you dont like it...you dont have to read it or agree with it.....freedom on speech 

 

Not to add fuel to your grammar fire, but isnt it 'uncharted' waters not 'unchartered' waters???

 

It's like the common fuck up with caring less.....most say I could care less....which means they still care! when they mean to say they couldnt care less.

 

VERBAL SAT SCORES ALL TIME LOW!!!!

 

UNPOSSIBLE!! 

earleflorida's picture

:-))

let freedom breathe...

exhale its nascent lexicons that all tongues will cherish its naivete fragrance of simplicity...

speak as if no audience exist, and drink with all but thy earful- pressed upon a wooden chalice- sipping  crimson lips at fluxing rest...

thus, as the wind spreads its gusting wings upon the hollowed canyons below- were it but an echo of thoughts remaining unheard- the world listens too an inner voice as yet- or ever, has never knowningly known...

were it not even knowing to question ones raison d`etre- this unsung wisdom- this linguistical, music of the spheres- where the creator makes adjustments to a planet he once call'd home...

all with just a simple breath from this unambiguous language, freedom to choose- the simplicity of it all...

Noteworthy: Socrates wrote nothing himself...

                    Jesus Christ wrote nothing himself...

                    Muhammad wrote nothing himself... *[he was illiterate] 

goldfish1's picture

There are still trillions of dollars to be stolen from middle class people

The transfer of wealth is nearing its completion. Musical chairs is about to conclude. Party's almost over for now. The trillions have been stolen.

This last Qe bit is to keep the facade from crumbling too. Does this sound bullish to you: 

 

Ohio women prisoners weave mats for homeless

Inmates at Ohio's prison for women are making mats for homeless people using an all-too-familiar artifact of the modern world: plastic grocery bags.

http://www.sanduskyregister.com/article/2559961

Vooter's picture

"The word is "tenet."  This silly ass goon doesn't even know the English language."

No, all he's saying is that his response to a question by a journalist after his speech is renting an apartment from Bernanke's FOMC stance. What's so hard to understand about that?

Mactheknife's picture

He sees massive problems in the shadow banking system.  And he takes marching orders from the primary dealers some of whom are European banks...not hard to see what kind of shit storm they are looking at. This is just another bank cartel bailout and will not create one job. Of course he knows that.

Assetman's picture

I think you are at least, in part, on the right track.

It appears most of those European banks see that there must be an endgame with Greece... and most of them are going to need adequate reserves to absorb the losses that are likely to come.

The other part of the equation is global trade.  Whether it's imports or exports, trade acvtivity worldwide is collapsing, due mainly to depressed activity in Europe, but also due to what is happening in China and to a lesser extent, Japan.  It doesn't matter if interest rates are low globally, activity is dropping off.

I think what Bernanke (and some other Fed members) see is a major deflationary wave that is globally based-- and it will not leave the US untouched.  They know that deflation isn't issue today... but they see major deflationary headwinds coming.   Otherwise, they'd be content on continuing these sterilized Treasury purchases.

Of course, buying MBS will do very little to directly help the employment situation of someone losing their job in the transport sector, for example.  The additonal liquidity from QE will be used to protect the finanical (shadow banking) system from catastrophic damage-- just as the Fed has always intended.

SafelyGraze's picture

found a dead squirrel in my back yard

experts do not yet know the cause of death

I am devastated

it was a baby squirrel

there was no sign of trauma or sickness

large-scale squirrel breeding programs are essential to the survival of the species 
http://www.youtube.com/watch?v=ryAK7L_7SZs

in other cnn headlines: Cause of panda cub death still unclear

palmereldritch's picture

Apparently, these two guys were seen in the neighborhood...

http://tinyurl.com/9kzloho

SafelyGraze's picture

+1 for the "squirrles scense"

+10 for the two peace officers

+100 for the caption's veiled reference to the LBJ 1964 signing of the coinage act, thereby debasing the last form of PM specie that provided domestic support for the unit-of-account-slash-medium-of-exchange, thus making silver=squirrel and LBJ+congress = GIJoe+friend in the poster depicting the crumbling curb in the road to serfdom and/or roota.

well played, palmereld (if that is your real name)!

you can't eat asphalt

SafelyGraze's picture

you're killing me.

you know that.

now behave.