This page has been archived and commenting is disabled.
Guest Post: Bernanke In A Box
From Jeff Snider of Atlantic Capital Management
Bernanke In A Box
His statement spoke volumes without saying anything. Yes, he disappointed the hardcore debasement enthusiasts called stock investors, but only at first. In between the lines of what he did say, it was crystal clear: Chairman Bernanke wants to do more QE. “Want” is not really the right word because it doesn’t really go far enough into Bernanke’s canon. I think it is abundantly clear he believes the Fed needs to do it as soon as operationally possible.
His concern on the economic issues is expected – anyone with rudimentary economic knowledge knows long-term unemployment can have lasting productive and social impacts or “scars”. He still seems confused about those headwinds, but at least has resigned himself and monetary policy to the fact that they are very real.
Rather, his attention to “financial uncertainty” and his view of the damage to “expectations” that comes with it is what really stands out now. Because the Fed is wedded to the rational expectations theory, financial uncertainty can become ingrained into investor psychology, flowing through to consumers and businesses. If consumers believe banks will be in trouble in the near future, they will act on those fears today. It is a mortal threat to the carefully cultivated, though utterly useless, appearance that everything is normal and good. The Fed has created trillions of dollars so that stocks will signal a robust future – and consumers and businesses will act today in the expectation of validity to that rosy, rainbow vision.
The beginning stages of another financial crisis or credit crunch change those expectations radically. This has to be nipped now, long before it permeates too far into the consciousness of the populace (not just in the US, but globally).
“We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September.”
He said QE 3.0, without really saying it. The markets, seeing the enlarged schedule for the September meeting and interpreting the likelihood of heavy discussions, have gotten the message. Stocks threw off the daily mortal struggle that is life as Bank of America and bid for the QE future that is now September (good riddance to August apparently). Gold prices followed on those expectations of a resumption to the willful and wanton dollar destruction that QE purely represents.
If the Chairman can influence a major market rally without ever having to face the growing dissent within the FOMC ranks, then his speech has proven to be a stroke of genius. That is the essence of rational expectations, making others believe you have magical powers so that they do your bidding without any actual work or direct engagement on your part.
But there is a huge downside to waiting, and Bernanke knows it. The financial crisis grows while the economy is sliding further into contraction. Time is not on his side.
So why does he wait?
Simple, Bernanke and QE is in a box – conditions currently in the wholesale money markets, especially the repo market, will not suffer more QE. As the unsecured Fed funds and eurodollar markets have effectively frozen for banks outside the primary dealer network, wholesale funding has been left to repos. However, there is already a shortage of treasury bills, the prime, vital collateral of nearly all post-2008 repo funding arrangements.
QE is nothing more than an extraction of those bills (and notes), creating that shortage in the first place. So while the primary dealers are loaded up with Fed-created bank reserves, they are not forwarding them to the wider marketplace out of well-founded fears of PIIGS exposures and currency mismatches between assets and liabilities. Despite an ocean of liquidity at the center, the wider system is now a desert. The Fed is held hostage by the operational realities of the design of the Federal Reserve system.
Should the Fed embark on a new QE program today, it would simply extract more of that vital collateral, exacerbating the shortage to the point of significant voluntary capital destruction – banks would be forced to take on t-bills at greater and greater negative rates. This kind of situation is purely deflationary, and nothing scares Bernanke more than that dreaded d-word.
As long as the unsecured markets remain in limbo, and they will as long as the global banking system is hiding its problems, the Fed CANNOT launch another round of QE, no matter how much Bernanke might want to. In the calculus of monetary primacy, the banking system will win every time, even at the potential expense of stocks and rational expectations.
So the Chairman is forced to jawbone stock investors into believing QE is not yet appropriate (they are constantly monitoring the economic situation), but is still imminent. Meanwhile, the Fed is actively engaged in expanding the reverse repo program to help alleviate the bill shortage. While no one was looking, it has taken its aggregate of reverse repo transactions to nearly $100 billion, from only $65 billion at the beginning of August.
Reverse repos are an exit strategy, not monetary accommodation. But, in the context of the wider wholesale market freeze, reverse repos expand the amount of treasuries, especially bills, available to be used as collateral by financial institutions outside the primary dealer network. As much as the Fed adheres to flawed ideology and oft-times inconsistent theoretical constructions, it is not likely to engage in monetary programs that are directly contradictory. Reverse repos and QE would cancel each other out.
The cue for more QE, then, is t-bill rates. If the shortage resolves itself at some point in the coming weeks, then the green light is on. There is no doubt that given that green light, Bernanke will take it – he has to if for no other reason than monetizing the debt (which may not be a problem right now, but it will be at some point). The question for September is, among other pressing concerns, whether or not the unsecured markets thaw enough to remove the squeeze in repo collateral. If that does not happen, stocks are certainly not positioned for a second consecutive episode of crushed QE expectations.
It may not matter anyway. The selling we saw in early to mid-August was precipitated by the banking squeeze to begin with. Should that intensify, the expectations of stock investors outside the general banking system will be the least of our problems. For now, Bernanke’s mystique will be tested in the coming weeks. Moral suasion is good for the textbooks, but it usually has little use during a real crisis.
»
- 24518 reads
- Printer-friendly version
- Send to friend
- advertisements -
The general population is ignorant on even the most basic principles of economics. All they know is that everything costs more and they want to know why. The media and Obama blame the republicans and increase welfare programs to keep the ghetto submissive. The problem is that the welfare increases have not been enough to keep up with Bernankflation. The ghetto isrestless. Whenthe Tubbs Jones brigade talks about "jobs" they are really talking about government checks, as in not big enough.
If the people were ever told the truth and could comprehend it then there would be a few thousand purple shirted minions outside every Fed office with tec-9s.
The country is surviving right now because of extended unemployment benefits and government healthcare. QE3 will cause massive inflation in food, gas, and base consumables and cause massive deficits in government programs. The government will be forced into a COLA in SS sooner or later and SS will be a trillion $ in debt by 2013.
The only solution is to declare the stock market an enemy of the state and privatize all publicy traded corporations. If the economy is so greatand corporations so healthy, shouldn't they be able to exist on the basis of business alone. I think very quickly that the books of every fortune 500 corporation are the greatest works of fiction ever written.
+
LOL. Friday was up. It's called short squeeze with sites like this one baiting the public herd into accumulating open put and short interest to refuel upward price movement.
WTF...Bernanke in a box , Blythe in trouble, Obama in political trouble. Sorry to be so bold and ruin your click bait, But WE are in a box. Not them.
seems citi et al are sending out ccard offers of 0% for 12 months
to get the buying going..won't work.. I want 0% and no payments for 24 months plus FRN's back for each purchase like 5% would do nicely..the TBTF are trying but not hard enough yet
no I want 0% no payments for 36 months and a GSE to back me up when I default..thats the ticket!!
I will gladly take their cards at a -1% interest rate in perpetuity with only a small yearly payment to me for the privilege of me using their plastic.
What? They do it with a straight face all the time!
a) Because announcing "No QE3" explicitly would jeopardize the "man who saved the world" image when the correction set in.
b) The Fed wants to see what happens in the German constitutional court with respect to bailouts before they proceed.
http://www.youtube.com/watch?v=89f9EPq_GtU
Just curious: why Nirvana and not Bowie?
Personal preference; never been a fan of Bowie's vocals, but I like his lyrics. I also prefer Hendrix' "All Along the Watchtower" and Nada Surf's cover of "Where is My Mind?" by Pixies.
The question is..
If we gave the Bernank a lighter & box cutter, could he figure how to get out of the box?
Charts analysis on euro
http://capital3x.com/?p=325
Fill euro analysis on EURO. The findings are purely based on price action rather than speculation.
http://capital3x.com/?p=317
What I heard from Bernanke yesterday was first, an outright admission that prior QE has largely failed in its (supposedly) primary purpose. The liquidity provided to stimulate the economy has not found its way to Main Street. It has become stuck in the hands of Wall Street gamblers who see lower risk and higher yields in stocks, commodities, and exotic OTC paper than real long-term investment. I don’t know why that should surprise anyone. Most of these people don’t even know what Main Street looks like, let alone how it operates.
Unfortunately for Ben, too many ordinary people now see this problem for him to get away with just blasting out another stimulus QE1-2 style. The advantage of hope on his side with the first ones would now be replaced by anger, fear, and retaliation. Unfortunately for us, I doubt this means Ben will get religion, roll over, and go home. His Wall Street masters will never permit it. What I suspect the next FOMC meeting will mostly be about is continuing the Wall Street support scam in more subtle and creative ways that will be less visible to the average investor. It may involve foreign markets, such as coopting with the Euro Central Bank bailouts, or stepping up currency wars with other nations. Who knows anything for sure except that, whatever they do, it will continue to benefit Wall Street a lot more than it does Main Street.
Wall Street profits +132%.
Corporate profits +43%.
Middle class incomes -17%.
Thanks Bernanke, you're really hekping the economy recover. Great job.
Learn to SPELL geezer!!!!!!!!!!!!!!!! you OLD FOOL
Listen 2 slewie WHO giveZ aFCK about the MiDDle CLASS
The author of this piece, like many/most, gets some things right but is missing the key aspects of this situation. He doesnt understand how commercial bank balance sheets work.
Yes - banks are short of collateral, but that is because the peripheral banks (and probably some primary market makers) no longer have access to other non-collateralized debt. I.e. if the problem is on the liabilities side of the balance sheet, then owning more treasuries doesn't help at all with the funding problem. And he again repeats that all those bad banks don't lend out all those excess reserves at the Treasury - NOBODY seems to get it that they CAN'T lend those reserves - that asset is neither cash nor liquid in any other way (except the one situation where if they went to the FED and asked for coins or notes for it).
QE can lower rates but they are already almost zero (and that hurts savers in the economy). QE may sop up what may have been selling in long end by people who no longer believe that Treasuries are the gold standard. But thats about it. Personally I think Bernanke was covering his ass admitting that this problem is bigger than just the FED, and if extraordinary measures are needed, the govt is going to need to take the lead. (not much they can do either to return to growth, but there is ALOT they can do to mitigate our situation)
The whole stock market is just a desperate colluded upon fantasy perception created by HFTs, market makers, PPT, and/or investment banks to maximise their short term profits through short squeezes and trend creation. False perception is reality for now, until the next more frequently encountered fat tail slaps them in the face once again.
Confidence is a systemic problem that isn't going to be fixed with more band-aids and lipstick. Actually, we have reached a critical juncture where more band-aids and lipstick are adding to the lack of confidence. It implies that our leaders don't have the capacity to fix the problems, or worse, don't even understand the problems.
The stock market could rally past April and beyond. It's not going to change anything. So rally on you stupid mo-mo chasers, and pretend that money you make is going to be worth something someday. Pretend that the young are suddenly going to acquire the skills to lead the country into the future (and take care of your old asses) after they've been unemployed or working McJobs for half their lives. Rally on!!!
So what are the odds Germany get's annihilated this week? Any thoughts post "flash crashing an entire country?" and how exactly does one do that anyways? "Flash crash an entire country"?
Because you say so?
How about the market reacts positively to NO QE3?
Or is that just too much for little brains to handle?
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
— Henry Ford
Congress doesn't want any responsibility for (its ongoing) monetization and neither does the president. This is a real problem that Bernanke cannot fix even if he wanted to. I think he might announce in September he is going to quit.
Take away fiscal flows and interest rates rise because govt. borrowing adds funds to private accounts. Without these funds there is competition for 'replacement funds' from the private sector.
The Fed is in danger of losing control of short rates. Treasury is going to have to issue lots more bills and shift maturities even further down the short end.
Bernanke has been blind-sided by EU crisis which has sharply increased demand for T-bills. Competition for credit is something the Wizards of Washington never considered.
The Fed is pumping cash by way of the swap lines (and buying longer dated EU paper by way of the ECB?)
... trying to keep the Europeans at home.
Bernanke put himself squarely in the box he's in by buying GSE and agency paper in 2009 instead of repo-ing it. There's an article by John Hussman detailing the process if you look through his site. Ben lifted the fiscal responsibility from Congress' shoulders and they never looked back.
Swapping trash for cash has been the strategy of the Bernanke Money Laundry, now it's blowing up. The only surprise is why it has taken so long ...?
IS-LM insists that any increase in short rates is inflationary due to demand, but the model assumes demand for goods and services rather than money market demand due to manipulation of short rates and a resulting flight to 'safety'.
Higher short-term money costs seem to be showing up in EU and Chinese money markets. Without cheap dollar liquidity both China and the EU crash, at least that is what it looks like from here.
This leaves out the $4 gas part ...
The Fed is a drama queen who always tries to do as much just jawboning an issue before they have to do actually do something. Besides, those $1.5 Trillion US deficits as far as the eye can see really tell the story. If the dupes already chosen for the super-congress give us a clue, then nothing is about to change in terms of cuts.
Bernanke is like that surgeon who cut off his patient's penis. He saved the guy's life. But now the guy isn't happy.
Go figure.
What does the penis represent?
It's complicated. The penis represents our nation's undebased and undevalued currency. When Bernanke created and funded the QE addition to the money supply, he cut off the penis and, ergo, devalued the dollar. And saved the nation"s life from the shit storm that soon will ensue without QE3.
As most of our lives haven't changed for the worse since the panic in the last quarter of 2008 -- the DJIA is back to 5 digits, unemployment seems to have a ceiling at 10% -- GDP is positive (albeit not by much) -- everybody wants his penis back, IOW the 2005 dollar.
To paraphrase Labor Secretary Donovan: "Where do I go to get my penis back?"
fiat penis
<-------- I'm long fiat penis. :)
But about the comment from Soldier above, were you being tongue-in-cheek about the penis? "...since the panic in the last quarter of 2008 -- the DJIA is back to 5 digits, unemployment seems to have a ceiling at 10% -- GDP is positive (albeit not by much) -- everybody wants his penis back, IOW the 2005 dollar."
DJIA might be over 10k in nominal terms but in real dollars it is not. GDP is only positive by intentional lying about the CPI and using very low adjustments, if GDP were adjusted by real inflation and the CPI actually measured such, we would see GDP probably below mid 1932 levels (adjusted for population of course). Real unemployment and under employment, the U6 measure is over 16%. And even the U6 does not count the millions that have been forced out of the labor pool.
There are far more indications of a broken economy, not just lingering glitches of a recession that has yet to finish dissipating, but real systemic malfunctions that are painfully obvious and the lower you go on the income level the worse it gets. As to income inequality we are breaking new and more dangerous ground every day that goes by. Never have we lived in such a gilded age, even the age that they made that term up for was not as unequal as the current period. Watch, it will prove to be the flood that washes the baby away with the bathwater.
Hey, your'e preaching to the choir. Hasn't the name of the game since Americans became familiar with those three magic words, credit default swaps, been keep the hideous news from Joe Sixpack. And all the dentists in Sherman Oaks?
And it worked. Joe and the dentists just looked at the top line of the Dow and, lo, they were contented.
3rd Q 2009 1st estimate GDP 3.5% Dow up $200.
2nd estimate GDP 2.8% Dow down $17,
3rd estimate GDP 2.2% Dow up $50
Dow up $230 on 2.2% GDP. Do the math.
To be honest, at the end of '08 and the beginning of '09, I never expected the normalcy that we've experienced since then. Bernanke had to print 3 trill to achieve it. Everybody's glad that life was so the similar to what it was, but they're pissed as hell that the currency is inflated.
One of the earliest examples of this mindset is in 1546 as "wolde you bothe eate your cake, and have your cake?" alluding to the impossibility of eating your cake and still having it afterwards;
The gold traders are especially pissed because on one hand the inflated dollar drove gold to the gates of $2000, and on the other hand pointed the way to the anarchy which will prohibit the enjoyment of the profit of their astute trades.
and now a word about the bernank's bosses and the mother club......
http://eastmanclann.files.wordpress.com/2011/08/20110812-daniel_krynicki...
please read and ponder what is said here. and then perhaps many of you will rethink this stupid idea about the gold standard.
that is a link to some of the dumbest shit on earth...file that in a new category of stupid.
There are no more benefits to be had from "monetary easing" or "fiscal stimulus".
We passed that point a long time ago.
Joe Banks: You look terrible, Mr. Waturi. You look like a bag of shit stuffed in a cheap suit. Not that anyone could look good under these zombie lights. I, I, I, I can feel them sucking the juice out of my eyeball. Suck, suck, suck, SUCK...
[makes a sucking noise]
Joe Banks: For 300 bucks a week, that's the news. For 300 bucks a week, I've lived in this sink, this used rubber.
Mr. Waturi: You watch it, mister! There's a woman here!
Joe Banks: [shouting] Don't you think I know that, Frank? Don't you think I am aware there is a woman here? I can smell her, like, like a flower. I can taste her, like sugar on my tongue. When I'm 20 feet away I can hear the fabric of her dress when she moves in her chair!
Joe Banks: And why, I ask myself, why have I put up with you? I can't imagine, but now I know. Fear. Yellow freakin' fear. I've been too chicken shit afraid to live my life so I sold it to you for three hundred freakin' dollars a week!
A shortage of T-bills (to be used as repo collateral) is a good indicator to follow. Keep an eye on Failure to Deliver numbers for Treasuries. In 2008, a huge percentage of Treasury transactions were completely imaginary, though, ahem, regulatory agencies didn't seem to notice.
Total Non-Borrowed Reserves are up to $1.76 Trillion (normally, NBRs would be in the tens of billions), and Bernanke would love to get the banks to lend these funds to institutions on the Reverse Repo Counterparty list. Watch to see if Spanky lowers the interest rate currently paid on NBRs to drive money in this direction. With big leverage---and why not lever up? He has already guaranteed absurdly low interest rates for at least 2 more years--- $1.76 T could fund $30 T in government debt.
The downside would be to shorten the overall debt maturity profile, but who cares? Bernanke will figure we can jump off that bridge when we get to it.
Does this NBR strategy seem unlikely to you? Consider that last month Fannie and Freddie were added to the list of approved Reverse Repo Counterparties. Now why would Ben want to do that?
for further discussion: http://www.itulip.com/forums/showthread.php/20181-Will-QE3-be-cloaked-in...
I completely agree with the explanation of Friday's rally (I wrote the same on my blog as it was happening).
I also agree that Ben wants QE3, but I think the main reason he didn't talk specifically about it is that he doesn't want a public debate. I think he wants to build as much consensus as he can on the FOMC, and for that, the less public attention the better (from his point of view)
The point about the shortage of Treasurys for collateral purposes is also a very good one. It's been discussed a lot over on FTAlphaville. I'm not sure though that Ben would agree it completely prevents him from doing QE3. You could theorize that his decision to do the reverse repos was aimed at overcoming that objection. Also, part of the reason for the recent shortage of Treasurys for collateral was that for a while Treasury wasn't net issuing much or anything due to the debt ceiling while the Fed was still a huge net buyer through the end of June. Now Treasury is net issuing huge amounts again, and the Fed's a smaller net buyer, just to replace its maturing mortgage debt. Ben's a crazy ivory tower type, I wouldn't count on him being constrained by logic. I think he's more afraid of the politics.
http://how-to-trade-armageddon.com/
congrats for being the first comment (that i've noticed) to make this point.
if bernako
is in a box...
tape it shut
and
mail to Bangladesh ..
bill me for the postage
gadaffi is in zimbabwe. i told that boy to go there in march and have all of his toys and gold shipped there too. but i guess it is never too late..
Go long packing tape