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5 Things To Ponder: The Fed
Submitted by Lance Roberts of STA Wealth Management,
It has been quite an eventful week between Scotland's battle over independence, the Federal Reserve's FOMC announcement and the markets making new all time highs.
For Scotland, the decision came down to the benefits of maintaining their unity with the United Kingdom. While William Wallace may not have agreed, the vote to remain part of the U.K., which can not happen again for a generation, removed a potential stumbling block for the markets globally.
The FOMC announcement was more comedy than anything else as the continued facade of the Fed's forecasting capabilities was revealed.
However, the reiteration of the Fed's commitment to "remain accommodative" for as long as necessary gave comfort to traders that while the "punch bowl" was no longer being refilled, it was not being taken away either.
However, one announcement from the Fed that did not get a lot of media attention was their new policy to "reduce" the size of the Fed's balance sheet. The general plan is as follows:
- Determine timing and pace of normalization
- Reduce securities holdings and maintain low interest rates
- Gradually reduce the reinvestment of principal repayments
- Sell mortgage-backed bonds if warranted.
- Reduce balance sheet over the longer term to only the size needed to implement policy.
These actions will be taken in conjunction with the Federal Reserve's attempt to normalize interest rate policy.
Importantly, these combined actions constitute the removal of the "punch bowl." While I suspect that Janel Yellen truly believes that the economy is strong enough to support such a process, a look at Japan's failed attempt as creating inflation, boosting economic growth and normalizing policy should give her a clue. This is a topic that I will delve into more deeply next week.
However, for this weekend's list of "Things To Ponder" I have accumulated a few reads relating to the Fed. As always, it is important to eliminate "confirmation bias" be evaluating decisions based on a complete understanding of the argument.
1) Fed Exit May Be A Bumpy Ride For Investors by Ben Eisen and Greg Robb via MarketWatch
This is a good article and MarketWatch delved into the four key policy tools that many market participants believe will be crucial to the exit, looking at how they will function, the market and policy implications, and what questions remain unanswered.
- Interest rates
- Reverse repos
- Excess reserves
- Managing the balance sheet
"The Federal Reserve’s next tightening cycle won’t look like anything investors have seen before.
The central bank has never attempted to hike interest rates with a $4.4 trillion balance sheet. To do so, the Fed is counting on a slew of new instruments — and the liftoff still might not function properly at first.
'They will be experimenting with new tools. Any time you do that, there are uncertainties and there are risks. We expect them to be able to manage it, but it could be a bumpy ride,' said Kim Schoenholtz, a professor in New York University’s Stern School of Business."
2) Fed Prepares To Raise Rates, End Failed QE via Real Clear Markets
"The Federal Reserve said Wednesday the economy isn't as strong as it believed just two months ago, and that it's not likely to raise interest rates soon. It's as close to an admission of failure as you'll ever get.
As rates rise, big questions remain: Will the higher rates the Fed is engineering sink the economy? Will we see unemployment return to recession levels?
It doesn't seem likely. And yet, in 2008, if someone had told you that the Census Bureau would report in September 2014 that median income had shrunk 8.2% over the preceding five years, and only those with the highest incomes would see any gains at all, you might have thought that person was crazy.
Well, it happened. Thanks to President Obama's misbegotten economic policies and "stimulus," and the Fed's own radical experiment in money printing, the U.S. has had its worst recovery ever from a recession.
To its credit, perhaps, the Fed is now quietly trying to undo its failed experiment, by letting markets set interest rates and shutting down the QE program. If so, it's a minor victory for common sense and policy prudence."
3) Why Fed Bet May End In Disappointment by Mohamed El-Erian via Bloomberg
"The U.S. Federal Reserve is trying to squeeze a bit more out of a stimulus policy that relies heavily on artificially boosting stock and bond markets to generate growth. In doing so, it is running a higher risk of financial instability, and increasing its dependence on a Congress that shows little sign of being able to handle fully its economic responsibilities."
4) Do The Fed's Forecasts Get Marked To Market? by Randall Forsyth via Barron's
"'Don't fight the Fed' is one of the oldest adages on Wall Street. But the financial markets remain at odds with the central bank's own projections for interest rates.
...the futures market is casting its dissent in the other direction—that the Fed officials are wrong in expecting faster and bigger rate hikes. That would seem to be a reflection of the markets' recognition that the Fed's forecasts for economic growth have proved mostly too optimistic.
Thus, the central bank thinks the U.S. economy is on a path for sustainable 3% growth while the futures market thinks it remains in its "New Normal" path around 2%."
5) The Math Of The "Dot Plot" by James Mackintosh via Financial Times
"[Fed members] all expect rates to start rising next year, and to rise by 175bp by the end of the year. Assuming the Fed sticks to 25bp hikes – although it doesn’t have to, it hasn’t raised rates more than that in a single meeting since May of 2000 – that means raising rates seven times next year.
But with the markets completely hung up on the idea that the phrase 'considerable time' in the FOMC statement amounts to a promise not to raise rates for six months – in other words, until April – it is worth considering that five out of the 17 participants appear to expect rates to go up by March.
Janet Yellen, Fed chair, had another go in her press conference today at trying to stop investors assuming that 'considerable time' means six months, saying there is no 'mechanical interpretation' of what it means – but if investors keep thinking it is six months, from the October end of QE, that means the first rate rise won’t come before April. The dots suggest there will be lots of pressure within the FOMC for a rise before that. Bond markets should wake up to the risk."
Bonus Reads:
IMF Warns Of Risks From Excessive Financial Market Bets via Reuters
Seth Klarman: "We Are Recreating The Markets Of 2007" via ZeroHedge
Stocks Up As Sun Unexpectedly Rises via Sigmund Holmes
...and a little blast from the past from "Good Times" as the "Secret Of The Fed" is given away.
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I may not be able to find junk silver for below 'spot', but I'm definitely buying it at ridiculously cheap prices.
"It was the best of times. It was the worst of times."
If you like buying silver here you will LOVE buying it under 10$ next year.
Less than a good steak, hmmm, how does that work?
Everyone raise their hands. Who is going to buy those mortgage backed bonds. Come on don't be shy.
Bwa, ha, ha, ha, ha, ha...
We are, silly! *points at the "Good Times" clip above*
Richard Fisher's "mechanical interpretation" may be to drive his SUV through an Eccles Building conference room window (with Plosser riding shotgun) if they don't start moving by April.
Bankers losing:http://www.huffingtonpost.ca/2014/09/19/supreme-court-credit-card-fee-ru...
Thought people here may like this. Small victory though it is.
How can you have an article on the Fed, without mentioning, on the same day, Fed supplied QE powered-nitro-freemoney-liftoff gave the world its biggest IPO/wealth-distribution-event in history?
Think Star Trek, Scotty, "Captain, I don't think she can take anymore!"
as rates rise... i've read that before. it always makes me laugh.
i told my friend recently that mel gibson was suspciously quiet in the mass media about his opinion about the scottish elections.
he should have used this opportunity to take the limelight pronounce that the english "can never take away our freedom!"
and then promote his next big movie heavily. but no. he was too much of a pussy to bring out his braveheart for this occasion.
the real william wallace would have stood up . mel gibson was a little bitch . this was his moment to shine. and he stayed shady.
Dynomite!!!
When does any "zero hedge" analysis include the existence of Wall Street?
Ooooo....I forgot..."we're the media and we're levered a billion to one! Now get me my one dollar back!"
Thanks, the pic of Yellen the liar with honest text, and the "Good Times" clip, are perfect.
Bet if you asked American's what the Federal Reserve is 7% could tell you.
"Good Times", circa 1974-1979, opening theme lyrics:
"Good Times.
Any time you meet a payment. - Good Times.
Any time you need a friend. - Good Times.
Any time you're out from under.
Not getting hassled, not getting hustled.
Keepin' your head above water,
Making a wave when you can.
Temporary lay offs. - Good Times.
Easy credit rip offs. - Good Times.
Scratchin' and surviving. - Good Times.
Hangin in a chow line - Good Times.
Ain't we lucky we got 'em - Good Times."
Century of Enslavement: The History of The Federal Reserve
http://www.youtube.com/watch?v=5IJeemTQ7Vk
.
http://www.corbettreport.com/federalreserve/
.
"Part One: The Origins of the Fed
“The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson.” – FDR letter to Colonel Edward House, Nov. 21 1933
All our lives we’ve been told that economics is boring. It’s dull. It’s not worth the time it takes to understand it. And all our lives, we’ve been lied to.
War. Poverty. Revolution. They all hinge on economics. And economics all rests on one key concept: money.
Money. It is the economic water in which we live our lives. We even call it ‘currency'; it flows around us, carries us in its wake. Drowns those who are not careful.
We use it every day in nearly every transaction we conduct. We spend our lives working for it, worrying about it, saving it, spending it, pinching it. It defines our social status. It compromises our morals. People are willing to fight, die and kill for it." j.c.
Again with the "Fed will raise rates" horseshit again. FAIL.
A game played every month.
The week before the FOMC meeting, the lamestream runs with "Fears of Hawkish Fed" headlines.
Then the Ponzi Munchkin repeats her "considerable time" meme, and surprise - surprise, markets rally with the 'good' news.
Only three things about the FedRes need be pondered:
1) Theft
2) Lies
3) Unconstitutional
An American, not US subject.
"Guillotine the Fed!"
FED: Hey banks, sell me your most worthless mortage backed securites you have on your books.
BANKS: Okay.
FED: Hey who wants to buy our $4 trillion worth of mortage backed securites?
EVERYONE: .........crickets chirping................
I Kinda like idea of everybody browwing their own money to make money from the Interest you have to pay yourself. Can't pay the Interest back, just borrow more money from youtself to pay back the Interest.
Nobody would ever have to work again
I nominate you as Fed chairman. It is a perfect fit!
Things may start to become unhinged very soon and the Fed is clueless as to where the assalt will start.
Every now and then a very notable and important event occurs, sometimes it slips by without even being noticed. For months the major world currencies have traded in a narrow range as if held in limbo by some great force. This has allowed people to think we were on sound footing as central banks across the world continued to print and pump out money chasing the "ever elusive growth" that always appears to be just around the corner.
Weak demand for goods and most of this money flowing into intangible investments inflation has not been a major problem, but the seeds for its future growth have been planted everywhere. John Maynard Keynes said By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. While there are not many Bond Vigilantes there are a slew of Currency Vigilantes and they are ready to make their presence known. Weakness in the value of the Yen, Pound, and Euro must not go unnoticed. More on why this may be a signal that currencies are about to get wild in the article below.
http://brucewilds.blogspot.com/2014/09/caution-alert-currencies-may-get-...
19 SEPTEMBER 2014
Gold Daily and Silver Weekly Charts - Option Expiration
"The mischief springs from the power which the moneyed interest derives from a paper currency which they are able to control, from the multitude of corporations with exclusive privileges which they have succeeded in obtaining in the different States, and which are employed altogether for their benefit; and unless you become more watchful in your States and check this spirit of monopoly and thirst for exclusive privileges you will in the end find that the most important powers of Government have been given or bartered away, and the control over your dearest interests has passed into the hands of these corporations."
Andrew Jackson, Farewell Address, March 4, 1837
What a parcel of rogues in a nation." ...jca
http://jessescrossroadscafe.blogspot.com/