St. Louis Fed

If the stock market were already crashing then it would be simple to blame the dismally sad rash of dead bankers in the last week on that - certainly that was reflected in 1929. However, for the third time in the last week, a senior financial executive has died in what appears to be a suicide. As Bloomberg reports, following the deaths of a JPMorgan senior manager (Tuesday) and a Deutsche Bank executive (Sunday), Russell Investments' Chief Economist (and former Fed economist) Mike Dueker was found dead at the side of a highway in Washington State. Police said the death appeared to be a suicide.

When in doubt... make it up.

All the pundits who preach an economic recovery in the US always fall strangely silent when asked to share their thoughts on the following chart (taken from the St. Louis Fed), showing the annual change in real disposable income per capita in the US. What seems to stump them most is that aside from the 2012 year end aberration (due to accelerated distribution of dividends ahead of the 2013 tax hikes) is that in November the series finally posted its first Y/Y decline (-0.1%) since the Lehman collapse. But as the chart notes, the data is "per capita" and as everyone knows, under the New Normal, some "per capitas" are more equal than other "per capitas." Enter the billionaires. As Bloomberg summarizes, "The richest people on the planet got even richer in 2013, adding $524 billion to their collective net worth, according to the Bloomberg Billionaires Index, a daily ranking of the world’s 300 wealthiest individuals. The aggregate net worth of the world’s top billionaires stood at $3.7 trillion at the market close on Dec. 31, according to the ranking. "The rich will keep getting richer in 2014," John Catsimatidis, the billionaire founder of real estate and energy conglomerate Red Apple Group Inc., said in a telephone interview from his New York office.

The Federal Reserve holds its last policy meeting of 2013 in the week ahead. In UBS' view there are four possible surprises that could affect the markets. From the odds of a taper to adjusting forecasts and from forward-guidance communication to the chances of a cut in the IOER, the FOMC meeting in the week ahead presents upside and downside risks to the dollar in the near term; even if UBS believes the longer-term will see USD strength against both the EUR and JPY.

Last month, we offered a plain language translation of the Warsh op-ed, because we thought it was too carefully worded and left readers wondering what he really wanted to say. Translation wasn’t necessary for Fisher’s speech, which contained a clear no-confidence vote in the Fed’s QE program. Now William Poole is more or less saying that we have no idea what’s truly behind the Fed’s decisions. But he doesn’t stop there. He’s willing to make a prediction that you wouldn’t expect from an establishment economist... Poole’s refreshingly honest take on the Fed’s inner workings – from someone who truly knows what goes on behind the curtains – is more than welcome.

"There are going to be consequences to central bank balance sheet expansion all over the world," Kyle Bass tells Steven Drobny in his new book, The New House of Money, adding "It’s a beggar-thy-neighbor policy, but everyone is beggaring thy neighbor." The Texan remains concerned at QE's effects on wealth inequality and worries that "at some point this is going to ignite and set cost pressures off." While Gold-in-JPY is his recommended trade for non-clients, his hugely convex trades on Japan's eventual collapse remain as he explains the endgame for his thesis, "won't buy back until JPY is at 350," and fears "the logical conclusion is war."

The relatively new Minneapolis Fed president Narayana Kocherlakota is not known for any insightful, original ideas. Before he took over the MinnFed, he was a research economist at the bank in the late 1990s, a consultant there from 1999 to 2009, taught at the University of Minnesota from 2005 to 2010 and was chairman of the U’s department of economics before being named president of the bank. What he is best known for is his epic flip-flopping: from one of the Fed's staunchest hawks early in his presidential career, to a dove so starved for the Fed's monetary liquidity, he often puts even Charles Evans to shame. He is among the first to suggest that the Fed should hold rates at zero until unemployment hits 5.5% (which it never will unless of course the plunge in the labor participation rate continues) something which both Goldman and Yellen have now adopted as gospel. Nobody knows what precipitated this shocking metamorphosis, although it is said Ben Bernanke can be quite persuasive during unrecorded phone calls. Which brings us to the topic of this post: what does a suspiciously reformed Fed dove do when faced with increasingly louder, conflicting voices that challenge the delusion that the only thing that will fix a failing QE is more QE? He fires them of course.

The Fed seems to be facing two major risks: first, premature tapering disrupting markets and triggering global turmoil across asset classes, thereby threatening the fragile economy recovery; second, delayed tapering further fuelling asset price bubbles, which could burst eventually and do major damage. UBS' Beat Siegenthaler notes the September decision suggested a Fed more worried about the fragile recovery than about the potential for asset bubbles and other longer-term problems associated with extended liquidity injections. Whereas it had originally assumed that a gradual tapering would result in a gradual market reaction, Siegenthaler explains it is now clear that the situation is much more binary; and as such, the hurdles for tapering might be substantially higher than originally thought.

Today's "good Fed cop" award goes to St. Louis Fed president James Bullard who has some words of caution which neither he, nor anyone else at the FOMC, will pay attention to:

• BULLARD SAYS RISK OF ASSET PRICE BUBBLES ‘HUGE ISSUE’ FOR FOMC
• BULLARD: LOW RATES, NOT JUST QE, WOULD ACCOUNT FOR ANY BUBBLE
• BULLARD SAYS LABOR FORCE PARTICIPATION DECLINE BEGAN IN 2000
• BULLARD SAYS LAND PRICES MAY BECOME ASSET PRICE BUBBLE
• BULLARD SAYS ‘I’M THE BIGGEST INFLATION HAWK’, or better known as dove in hawk's clothing

And the punchline:

• BULLARD: `THERE MAY BE SOME OTHER' ASSET BUBBLE `GOING ON'

Yes: the bubble of Fed "assets"

While the pile of debt keeps growing and monetary intrusion becomes more drastic by the day, there’s almost no talk of inflation. A growing number of investors ask themselves this question.

Normally, we would report the change in total consumer debt (revolving and non-revolving) in this space, but today we will pass, for the simple reason that the number is the merely the latest entrant in a long series of absolutely made up garbage. It appears that in the "quiet period" of data releases, when the BLS realized its "non-critical", pre-update 8MHz 8086-based machines are unable to boot up the random number generator spreadsheets known as "economic data", Ben Bernanke decided to quietly slip a modest revision to the monthly consumer credit data. A modest revision, which amounts to a whopping $180 billion cumulative increase in non-revolving credit beginning in January 2006.

Almost exactly one year ago we wrote "The Next Subprime Crisis Is Here: Over $120 Billion In Federal Student Loans In Default" in which we took the latest (2009 three year cohort) loan default data on Federal Student Loans released by the Department of Education and applied it to the total amount of student loans outstanding, which back then was $914 billion. Yesterday, ED.gov provided its annual update - this time to the 2010 three year and 2011 two year cohorts - and to nobody's major surprise, learned that things just got even worse. To wit: "The national two-year cohort default rate rose from 9.1 percent for FY 2010 to 10 percent for FY 2011. The three-year cohort default rate rose from 13.4 percent for FY 2009 to 14.7 percent for FY 2010." Putting this in context, according to Bloomberg defaults have risen to the highest level since 1995. The irony that this is happening in the aftermath of Bernanke's disastrous ZIRP policy is not lost on anyone.

In the upcoming week markets will continue to focus on these fiscal issues in the US, now that a temporary Government shutdown past Tuesday is assured. Still on the fiscal side but outside the US, look forward to Prime Minister Abe announcing his final decision on the VAT hike as well as unveiling a widely anticipated economic stimulus package. Finally, fiscal policy also played a role in the Italian political instability with four ministers resigning from the coalition Government. The backdrop to these events is a rapid deterioration of the political climate after former PM Berlusconi was convicted of tax evasion by a High Court.

When even the Fed's personal trusted scribe, the WSJ's Jon Hilsenrath, who at least on one occasion saw substantial editorial influence by the NYFed on his upcoming article (dealing with his "prize winning" investigation into Stephen Friedman), accuses the Fed of failing to communicate, one can imagine just how badly the streams of telegraphing futures step by the Marriner Eccles central planners must have gotten crossed. From Hilsy: "Federal Reserve officials created new uncertainty about how much farther they will push their easy-money policies—and new questions about how effective they are at communicating their thinking—with the decision to stand pat on the pace of their bond purchases for now.... Fed Chairman Ben Bernanke also seemed to walk away from some of the guidance he had given in June on how the bond-buying program would play out over the next year, making it even less clear when the program will end." This is ironic, because it was none other than Hilsenrath back on May 10 who wrote "Fed Maps Exit from Stimulus" in which he first laid out that "Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations." How does it feel to have been used Jon?

A quiet week to send off August ahead of a deluge of key data next week and as the fateful Septembr 18 FOMC announcement approaches. Still, quite a few macro events to keep track of.