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Peter Schiff Bashes "Ben's Rocket To Nowhere"

Tyler Durden's picture





 

Submitted by Peter Schiff via Euro Pacific Capital,

Herd mentality can be as frustrating as it is inexplicable. Once a crowd starts moving, momentum can be all that matters and clear signs and warnings are often totally ignored. Financial markets are currently following this pattern with respect to the unshakable belief that the Federal Reserve is ready, willing, and most importantly, able, to immediately execute a wind down of its quantitative easing program. How this notion became so deeply entrenched is a mystery, but the stampede it has sparked is getting more violent, and irrational, by the day.

The release last week of the minutes of the October Fed policy meeting was a case study in dangerous collective delusion. Although the report did not contain a shred of hard information about the certainty or timing of a "tapering" campaign, most observers read into it definitive proof that the Fed would jump into action by December or March at the latest.

But while the Fed was gaining much attention by saying nothing, the Chinese made a blockbuster statement that was summarily ignored. Last week, a deputy governor of the People's Bank of China said that buying foreign exchange reserves was now no longer in China's national interest. The implication that China may no longer be accumulating U.S. government debt would amount to the "mother of all tapers" and could create a clear and present danger to the American economy. But the story barely rated a mention in the American media.

Instead, the current environment is all about the imminent Fed taper: the process of winding down the Fed's monthly purchases of $85 billion of treasury debt and mortgage-backed securities. However, the crowd fails to grasp that the Fed has embarked on an impossible mission. The herd is blissfully unaware that the Fed may not be able to reverse, or even slow, the course of QE without immediately sending the economy back into recession.

In an interview this week, outgoing Fed Chairman Ben Bernanke likened the QE program to the first stage in a multiple stage rocket that gets the spacecraft off the ground and accelerates it to the point where it is close to achieving permanent orbit. Like a first stage that has spent its fuel and has become dead weight, Bernanke seems to concede that QE is no longer capable of providing positive thrust, and as a result can now be jettisoned (like a first stage) so that the remainder of the spacecraft/economy can now move higher and faster. The Chairman's nifty metaphor provides some inspiring visuals, but is completely flawed in just about every way imaginable.

In real rocketry, when the first stage separates, it falls back to earth and is no longer a burden to the remainder of the ship. Subsequent booster rockets (which in economic terms Bernanke imagines would be continuation of zero interest rate policies) build on the gains made by the first stage. But the almost $4 trillion in assets that the Fed has accumulated as a result of the QE program will not simply vaporize into the stratosphere like a discarded rocket engine. In fact it will remain tethered to the rest of the economy with chains of solid lead.

In the process of accumulating the world's largest cache of Treasuries, the Fed has become the most important player in that market. I believe the Fed can't stop accumulating and dispose of its inventory without creating major market disruptions that will drag the economy down.

This would be true even if the economic rocket were actually approaching escape velocity. In reality, we are still sitting on the launch pad. By keeping interest rates far below market levels and by channeling newly created dollars directly into the financial markets, the QE program has resulted in major gains in the stock, real estate, and bond markets. Many have argued that all three are currently in bubble territory. Yet to the casual observer, these gains are proof of America's surging economic vitality.

But things look very different on Main Street, where the employment picture has not kept pace with the rising prices of financial assets. The work force participation rate continues to shrink (recently falling back to levels last seen in 1978),real wages have declined, and since the end of 2009 the temporary workforce has grown at a pace that is 14 times faster than those with permanent jobs. Americans are driving less, vacationing less, and switching to lower quality products and services in order to deal with falling purchasing power.

But the herd is closely watching the Fed's rocket show and does not understand that stocks and housing will likely fall, and bond yields rise steeply, once the QE is removed. The crowd is similarly ignoring the significance of the Chinese announcement.

Over the past decade or so, the People's Bank of China has been one of the largest buyers of U.S. Treasuries (after various U.S. government entities that are essentially nationalizing U.S. debt). China currently sits on $1 trillion or more in U.S. bond obligations.

So, just as many expect that the #1 buyer of Treasuries (the Fed) will soon begin paring back its purchases, the top foreign holder may cease buying, thereby opening a second front in the taper campaign. This should cause any level-headed observer to conclude that the market for such bonds will fall dramatically, causing severe upward pressure on interest rates. But the possibility is not widely discussed.

Also left out of the discussion is the degree to which remaining private demand for Treasuries is a function of the Fed's backstop (the Greenspan put, renewed by Bernanke, and expected to be maintained by Yellen). The ultra-low yields currently offered by long-term Treasuries are only acceptable to investors so long as the Fed removes the risk of significant price declines. If the private buyers, the Fed, China (and other central banks that may likely follow China's lead) refuse to buy Treasuries, who will take on the slack?  Absent the Fed's backstop, prices will likely have to fall considerably to offer an acceptable risk/reward dynamic to investors. The problem is that any yield high enough to satisfy investors may be too high for the government or the economy to afford.

Little thought seems to be given to how the economy would react to 5% yields on 10 year Treasuries (a modest number in historical standards). The herd assumes that our stronger economy could handle such levels. In reality, 5% rates would likely deeply impact the financial sector, prick the bubbles in housing and stocks, blow a hole in the federal budget, and cause sizable losses in the value of the Fed's bond holdings. These developments would require the Fed to devise a rocket with even more power than the one it is now thinking of discarding.

That is why when it comes to tapering, the Fed is all bark and no bite. In fact, toward the end of last week, Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, said that the Fed "won't taper its bond-buying until the economy is ready."He must know that the economy will never be ready. It's like a drug addict claiming that he'll stop using when he no longer needs them to stay high.

But the market understands none of this. Instead it is operating under dangerous delusions that are creating sky-high valuations for the latest social media craze, undermining the investment case for gold and other inflation hedges, and encouraging people to ignore growing risks that are hiding in plain sight.

This is not unusual in market history. When the spell is finally broken and markets wake up to reality, we will scratch our heads and wonder how we could ever have been so misguided.

 


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Mon, 11/25/2013 - 21:07 | Link to Comment prains
prains's picture

when the trap door opens on this ponzi, the only way out for the Oligarchs is WOAR

Mon, 11/25/2013 - 21:40 | Link to Comment NotApplicable
NotApplicable's picture

Got Nukes?

Mon, 11/25/2013 - 22:04 | Link to Comment Pladizow
Pladizow's picture

How do you exit a market, when you are the market?

Mon, 11/25/2013 - 22:12 | Link to Comment Downtoolong
Downtoolong's picture

That is a whale of a problem. Just ask Jamie.

 

Tue, 11/26/2013 - 02:21 | Link to Comment Fish Gone Bad
Fish Gone Bad's picture

The only person Bernanke is fooling is unfortunately, himself.  Just because the Fed can get everyone to believe the kings new clothes are the finest, everyone knows that the king has no clothes. 

Tue, 11/26/2013 - 06:58 | Link to Comment StychoKiller
StychoKiller's picture

The Fed is riding a one-way ticket to nowhere!

Tue, 11/26/2013 - 08:28 | Link to Comment kralizec
kralizec's picture

Bullish for streetlight decorations.

Tue, 11/26/2013 - 03:21 | Link to Comment sixsigma cygnus...
sixsigma cygnusatratus's picture

Perhaps we will find out in December about a Super Duper Federaler Reserve Act of 2013.

Mon, 11/25/2013 - 22:50 | Link to Comment yogibear
yogibear's picture

Hopefully their necks tied with rope will be at the end of it.

Mon, 11/25/2013 - 21:15 | Link to Comment Four chan
Four chan's picture

china buys feds worthless mbs...just kidding, we bought it, fellow taxpayer and saver.

Mon, 11/25/2013 - 21:15 | Link to Comment Sufiy
Sufiy's picture


Gold Is In A Vertical Reversal After Overnight Smashdown


 We have a very interesting print in the Gold market today. After the news about Iran Nuclear Deal over the weekend somebody was very much inclined to put a very negative Gold and positive US Dollar spin on it. After dumping 1500 contracts overnight the Gold was in a waterfall mode again and reached low of the day at $1225.80. US Dollar was levitating above 81.00 at some point with Dow and Nasdaq printing new Highs again.    But by the beginning of the trading day in NY Gold has started its vertical reversal and is trading Up $8.30 now at $1252. US Dollar is Up for the day, but down from its intraday highs to 80.90    As we have mentioned before, US Dollar has printed a number of bearish candles on the daily chart last week and we will continue to monitor its action. What will happen next here will determine the direction for the Gold. Is it the bullish flag in the making or Double Top Reversal from the upper band of the recent downtrend line? Momentum indicators are pointing lower now on the USD chart below.   Shellbomb announcement from China about its new policy towards reserves and Yuan appreciation are still making its rounds under the mainstream media radar. Once they sink into the market the inevitable QE Taper will be questioned again, particularly when people will remember that markets can Go Down As Well. No Bears are left in the Equity markets and No Bulls are left in the Gold market - everything is set up for the big surprise as usual. What will trigger that surprise? Maybe the chart below with the NYSE Margin Debt can give us some clues. Please note that Margin Debt Amount normally peaks before the Stock Market. Any move towards Taper will raise Interest Rates and we can have the Top in Margin Debt very soon if not already. http://sufiy.blogspot.co.uk/2013/11/gold-is-in-vertical-reversal-after.h...

Mon, 11/25/2013 - 21:18 | Link to Comment uncle.bigs
uncle.bigs's picture

Look at interest rates with QE and without.  Rates rise during QE and fall without it.  If the Fed tapers (they won't), rates would fall not rise.

Tue, 11/26/2013 - 02:27 | Link to Comment Alpha Monkey
Alpha Monkey's picture

I agree that in the short term, post QE, rates MAY fall, as panic from losses in stocks would trigger a migration to bond "safety". But without QE to keep the rates low, rates would start to rise as the dust settles and people move from bonds into other asset classes and/or take the gains from bonds. Least, that's the way I see it. 

Tue, 11/26/2013 - 04:10 | Link to Comment Notarocketscientist
Notarocketscientist's picture

Ya they'd fall because there would be global calamity if the Fed tapered - and whenever there is calamity cash runs to treasuries as the ultimate safe haven.

Unfortunately the only safe haven that remain are gold and silver - treasuries will be worthless.

Tue, 11/26/2013 - 12:12 | Link to Comment Againstthelie
Againstthelie's picture

Good point.

But  if interest rates fall without QE, then it is because of a flight from the stock market and into treasuries. Not very bullish for the economy methinks...

We also don't know how much frontrunning the FED was part of the falling rates prior the official QE announcements. Frontrunning the FED and during QE unwinding at the highest prices. If this was the case, then QE has elevated prices (supressed rates) although we saw them rising during QE.

IMO the market believes everything was normalizing and therefore the FED could normalize, too. But what the market get's wrong, is that this is an artificial equilibrium and all kind of strange things could happen, if the most important pillar is removed.

Mon, 11/25/2013 - 21:51 | Link to Comment Wahooo
Wahooo's picture

Silver has bottomed as well. Up through the end of the year from here I'm thinking.

Mon, 11/25/2013 - 21:17 | Link to Comment Running On Bing...
Running On Bingo Fuel's picture

Peter Rothschild-Schiff secretly stashes Litecoin in his digital jockstrap.

Over.

Tue, 11/26/2013 - 09:32 | Link to Comment Singelguy
Singelguy's picture

Watch Peter Schiff' s video on bitcoin. He is clearly not a digital currency bug!

Mon, 11/25/2013 - 21:17 | Link to Comment alfred b.
alfred b.'s picture

 

     The Fed is "Bubble Boy" serving the bankster cartel

 

Mon, 11/25/2013 - 21:20 | Link to Comment Seasmoke
Seasmoke's picture

Good news, for people who like bad news. 

Mon, 11/25/2013 - 21:24 | Link to Comment NoDebt
NoDebt's picture

"the unshakable belief that the Federal Reserve is ready, willing, and most importantly, able, to immediately execute a wind down of its quantitative easing program. How this notion became so deeply entrenched is a mystery,"

No, it's not Pete.  They were the only game in town that could make action.  All the other bookies were broke.  So everyone plays the Fed's game now.

Getting a bit sick and tired of people (smart and stupid alike) saying they "don't know how this happened".  It's the natural extension of 30+ years of the same game- Don't fight the Fed.  That's how you end up with the Fed as the undisputed heavyweight champ of the world and no challengers.  If it's obvious to a piker like me, surely it must be obvious to others.

THEY CONTROL THE DAMNED CURRENCY SUPPLY, PETE, AND THEY HAVE VIRTUALLY UNLIMITED POWERS.  What the hell did you think was going to happen??


Tue, 11/26/2013 - 07:47 | Link to Comment viator
viator's picture

So what's the end game? Do you think they can continue as heavyweight champ of the world with unlimited powers forever? If true then we are going to be eating grass shortly. At some point society needs a real economy, spontaneous order and actual price discovery. Wealth and jobs need to be created.

Tue, 11/26/2013 - 14:54 | Link to Comment SDShack
SDShack's picture

The end game is to get defacto control of the bond market. That way the bond vigilantes are powerless. TPTB are all sociopaths. They only care about themselves and their own power. They have devised a system that works perfectly in their twisted world. They learned what the threats to their system were in 2008 here, and later in Europe. They learned they have to control the bond vigilantes to pull this off. The first step was eliminating Glass Steagal and Mark to Market. Next was establishing TBTF. Next, they print money and use QE to infinity to buy all govt debt, effectively monetizing the debt so the goodies to the FSA can continue unabated, while at the same time using profits from the printed money flow margin to the primary dealers to be leveraged up to buy stocks. It's the perfect Ponzi system. Every stakeholder, the masses and the rich, gets something for free in a perpetually printed money loop. There is no way they let this thing blow up. They have worked too hard to establish it. This is the culmination of 100 years of work. The banks WANT to own all govt debt because that means they own govt. That's the dream oligarchy for the NWO to allow them to control everything. Only a world wide revolution will blow this up, and I am finding it harder and harder to see where a world wide revolution is going to spring up. Everyone is rapidly geting sucked into the NWO club. It's like the Borg.... resistance is futile.

Mon, 11/25/2013 - 21:32 | Link to Comment Spankrupt
Spankrupt's picture

The Chinese are using American dollars (trade imbalances) to purchase treasuries. When the Chineese nix the buying, a deflationary event indeed. Ben Herrnanke and Yellen for Mellon must up the ante as the Fed's bond inventory rolls over. Who's buying, Gross? Doubt it. The treasury will need to solicit buyers. Who will buy in a rising interest rate environment, probably CALPERS so they can fuck the next round of retirees. I can hear it now. "Good Bank, Bad Bank. Tsk, Tsk, bad fed economist. I smell an Iran event.

Mon, 11/25/2013 - 21:59 | Link to Comment Pure Evil
Pure Evil's picture

Well, officially, the Iranians have six months to hang themselves.

Seems about the same amount of time that was needed to put all the resources in place to invade Iraq. More than enough time to prepare in case the Iranians decide to fuck with The Great Satan.

But, at the same time I think the Wookie has more balls than Obozo when it comes to playing The Great Game.

Mon, 11/25/2013 - 21:40 | Link to Comment ImReady
ImReady's picture

Why would UBS do this?

 

Mon, 11/25/2013 - 21:43 | Link to Comment ImReady
ImReady's picture

Thanks, I figured is wasn't for altruistic reasons.

Mon, 11/25/2013 - 21:46 | Link to Comment fonzannoon
fonzannoon's picture

Amazing what still goes on...

"ne plaintiff's attorney, Lars Soreide, said he filed a Financial Industry Regulatory Authority Inc. complaint against UBS Financial Services of Puerto Rico last week on behalf of a 70-year-old retiree whose portfolio of $500,000 was invested entirely in proprietary closed-end funds, along with individual municipal securities contained inside the funds she already owned.

She opened a line of credit with UBS that “she used to buy her home, and is now selling the portfolio to cover the equity line she took out,” said Mr. Soreide. “She relied on the income [from the municipal holdings] to pay for retirement, and UBS has been liquidating the holdings to pay interest on margin loans.”

Mon, 11/25/2013 - 21:52 | Link to Comment disabledvet
disabledvet's picture

"you can't fight City Hall." interesting though. In theory you could go after them under the Sherman Anti-trust Act...might take a while for your claim to heard. "more moths from the shoe box"...plus you'll be pushing up daisies by the time you "win."

Mon, 11/25/2013 - 21:47 | Link to Comment disabledvet
disabledvet's picture

the Schiff is in over his head and about to have his credit lines pulled. this is such a "far out" falsehood it's sad to see it peddled in these here parts. the spread has never been wider for the banks...the profits they are generating from "internal operations" alone are massive. don't even get me started on Mastercard or Visa. Not even "balls to the wall" Tepper is going anywhere near this wide a spread prediction...and yes he is very short duration (meaning the then year) apparently. could it happen? sure. but with no Syria and the ACA a shoebox with a moth flying out of the thing i think the gig is up....everyone got played. the Federal Government has in effect shut itself down for the time being as Plan D (as in all things digital) goes into effect. from "shoe box" to "shoe string." early retirements, home schooling...the revolution becomes a devolution. "some radical you turned out to be" becomes the meme.

Mon, 11/25/2013 - 23:16 | Link to Comment AngelEyes00
AngelEyes00's picture

"In fact, toward the end of last week, Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, said that the Fed "won't taper its bond-buying until the economy is ready."He must know that the economy will never be ready. It's like a drug addict claiming that he'll stop using when he no longer needs them to stay high."

That's exactly it.  There's nothing in the offing of an anemic economy that will substitute for mainlining purely printed eighty five billion fresh money injections every single month, totaling a trillion a year.  That's a whole lot of mulah to get hooked on.  I think they call it withdrawals when drug addicts are coming down, and these assets are going to drop leaving the koolaid drinkers to puke up some worthless stocks.  Real estate is one step ahead already backing off.  I guess the big rollers feel they can move stock faster than real property, so are waiting for the moment the big boys computers start moving that stuff super fast.  Look for days when the market hits limits on the way down.

Tue, 11/26/2013 - 14:57 | Link to Comment SDShack
SDShack's picture

Yes it has to be engineered crashes. That's how TPTB get the assets from the sheep. The sheep are either scared into selling, or forced into selling to get money to live on. TPTB pick up the assets for pennies on the dollar. Just the way they always do.

Mon, 11/25/2013 - 23:40 | Link to Comment jon dough
jon dough's picture

Paging ekm...

"In reality, 5% rates would likely deeply impact the financial sector, prick the bubbles in housing and stocks, blow a hole in the federal budget, and cause sizable losses in the value of the Fed's bond holdings."

Tue, 11/26/2013 - 04:11 | Link to Comment Gief Gold Plox
Gief Gold Plox's picture

Lets entertain a thought that the Chinese "not in our national interest" is just a public threat, not to be taken literally. This is my thinking because they already sit on $1T+ of US debt and if they wanted to they could easily play rough without speaking up in advance. So what is it that they want to achieve? Lower gold price? US turning a blind eye on a potential regional conflict? I don't know. But it sure as hell isn't what they're announcing.

Tue, 11/26/2013 - 07:06 | Link to Comment StychoKiller
StychoKiller's picture

How much is Tiawanese real estate worth?  How about them barren rocks that the Japanese claim as theirs?

Tue, 11/26/2013 - 07:16 | Link to Comment ptolemy_newit
ptolemy_newit's picture
  1. China wants the east and south China seas.  is it work a trillion or 2 YES. South east Asia will be owned by the Orientals
  2. Sorry Japan you lose (island) with revenge all around!  Good luck with your imports
  3. Deflation is good for China in the short term cycle to lock up the next 10 years of resource
  4. So sorry JPM cooper etf we eliminate copper finacing method. Look for copper to breakk down before in March.
  5. Amerika has no manufacturing we need? We sell dolllar buy Euro up to 1.52 ouch for Germany, good for china export,  airbus is good boeing is bad. 

 

Tue, 11/26/2013 - 08:22 | Link to Comment honestann
honestann's picture

I said this months ago when the fed was pretending to taper soon, and obviously it is time to say this again.  Here is what the fed is doing.

They know QE is harmful.  But they also know that only ever-increasing QE will keep the economy from collapsing in the short term.  So they don't want to increase QE, but they want the effects of increasing QE.  How do they accomplish this?

Simple!  They manipulating the psychology to expect a reduction in QE.  Then, when they FAIL to reduce QE, the psychology will be the same as if they had kept quiet and increased QE.  So they get the effect of increasing QE without having to actually increase QE.

Now, they've already done this once, folks, in September (as I recall).  Obviously it more-or-less worked as they planned, as the surge towards ever increasing risk, leverage and prices of paper assets has continued.

So they are trying it again.

And they will keep trying this trick until... the market calls them on it, or the economy completely collapses, which gets closer every month.

Too bad most people can't see a simple scam even when it is right in front of their eyes, and even when the scam was put upon them in the very recent past.  Sheesh.  Human beings.  What fools.

Tue, 11/26/2013 - 13:34 | Link to Comment Againstthelie
Againstthelie's picture

They manipulating the psychology to expect a reduction in QE.  Then, when they FAIL to reduce QE, the psychology will be the same as if they had kept quiet and increased QE.  So they get the effect of increasing QE without having to actually increase QE.

I don't get it. The charade about tapering had the effect like they actually were decreasing the purchases. Without tapering they created the effect like they were tapering. Now if they FAIL to taper, what will happen? Bonds will rally and rates will fall again. Back to where they were before the test balloon with tapering was played.

So they increased the rates although they want the rates to stay low.

The FED is not almighty. They thought the market would be able to handle some tapering and it seems they were wrong. Now they have the problem not to taper withouth losing face and therefore damaging confidence in the FED. This potential loss of confidence maybe is also teh reason for the continued attack on Gold. It's not the price of Gold that counts, it's the movement of Gold's price at certain moments, that is the dangerous indicator for the ponzi-debtslavery-masters.

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