Ben Bernanke

We feel that now there is a Bermuda Triangle of economics - a space where everything tends to disappear without radar contact, a black hole in which rationality and science is replaced by hope, superstition and nonsense pundits pretending to understand the real drivers of the economy. The Bermuda Triangle in real life runs from Bermuda to Puerto Rico to Miami. The Economic Bermuda Triangle (EBT) one runs from high stock market valuations to high unemployment to low growth/productivity. There is a myth that the sunken Atlantis could be in the middle of this triangle. It has been renamed Modern Monetary Theory (MMT) to make it suit the black hole's main premise of ensuring there is a fancy name for what is essentially the same economic recipe: print and spend money, then wait and pray for better weather. The EBT is getting harder and harder to justify - if for nothing else because the constant reminders of crisis keep us all defensive and non-committed to investing beyond the next quarter. We all naively think we can exit the "risk-on" trade before anyone else. We are due for a new crisis. We have governments and central banks proactively pursuing bubbles. A long time ago, policymakers entered a one-way street where reversing is, if not illegal, then impossible.

Parasites must balance their drive to maximize what they extract from their host with the risk of losing everything by killing their host. This is the dilemma of the parasitic partnership of the central state and financial Elites everywhere: to extract the maximum possible in debt payments and taxes without sparking rebellion and revolution. The 30 million whose labor funds the parasitic status quo don't have to rebel; they simply have to stop going to work, stop starting enterprises, stop being productive. They just have to tire of being the host, tire of being debt-serfs, tire of being tax donkeys. The trick to suppressing revolution is to keep debt-tax serfdom bearable. The parasitic Elites are keeping the host going, but at a high cost in resiliency. Let's see how long the host lasts once a crisis hits.

While there are a plethora of Wall Street analysts calling for much higher levels for the S&P 500; most of these calls are based simply on the belief that the current trajectory must continue indefinitely.  While you certainly cannot "fight the Fed" the underlying fundamentals and economics that support the markets long term are not present for the party.  What is very important to understand, and can be clearly seen in the chart below, is that despite repeated calls for "ever rising" stock markets in the past eventually left investors devastated.  Markets do not, and cannot, continue indefinitely in one direction. Unfortunately, for most individuals, by the time they realize what is happening it will likely be far too late to act. Could the catalyst be 'language' changes from the FOMC as they see bubbles and froth in high-yield credit and margined stocks?

It’s amazing what people can trick themselves into believing and even shout about when you tell them exactly what they want to hear. It was disappointing to see Brad DeLong’s latest defense of Fed policy, which was published this past weekend and trumpeted far and wide by like-minded bloggers. If you take DeLong’s word for it, you would think that the only policy risk that concerns hedge fund managers is a return to full employment. He suggests that these managers criticize existing policy only because they’ve made bad bets that are losing money, while they naively expect the Fed’s “political masters” to bail them out. Well, every one of these claims is blatantly false. DeLong’s story is irresponsible and arrogant, really. And since he flouts the truth in his worst articles and ignores half the picture in much of the rest, we’ll take a stab here at a more balanced summary of the pros and cons of the Fed’s current policies. We’ll try to capture the discussion that’s occurring within the investment community that DeLong ridicules. Firstly, the benefits of existing policies are well understood. Monetary stimulus has certainly contributed to the meager growth of recent years. And jobs that are preserved in the near-term have helped to mitigate the rise in long-term unemployment, which can weigh on the economy for years to come. These are the primary benefits of monetary stimulus, and we don’t recall any hedge fund managers disputing them. But the ultimate success or failure of today’s policies won’t be determined by these benefits alone – there are many delayed effects and unintended consequences. Here are seven long-term risks that aren’t mentioned in DeLong’s article...

Elizabeth Warren is one of the few Senators out there pushing to understand why the federal government has created an untouchable class of criminals in America that can do whatever they want whenever they want and, not only get away with it, but also get bailed out when they make mistakes. Now she has written a letter to Ben Bernanke, Eric Holder and Mary Jo White.  My favorite line is: “If large financial institutions can break the law and accumulate millions in profits and, if they get caught, settle by paying out of those profits, they do not have much incentive to follow the law.” Indeed, which is why they don’t.  Full letter embedded below.

With the president so busy with teleprompted appearances, one is almost reminded of the presidential campaign when this was an hourly event, although since that is not the case and since the president is engaged in now seemingly endless damage control, one wonders if Ben Bernanke is able to govern the country entirely on his own. So far so good, if the country is just the Stalingrad & Poor 500 of course. As for Obama, he will next speak, following a customary delay, on the "situation regarding the internal  [and less than impartial] revenue service." Let's listen in.

With Paulson's star long gone down, there are few remaining "new generation" hedge fund wunderkinds, especially in a world in which the best performing hedge fund is Federal Reserve Capital LLC - Onshore Fund. One among them is Third Point's Dan Loeb, who continues to be one of the best performing hedge fund managers for the 4th year in a row. He just filed his Q1 13F, amounting to $5.3 billion in disclosed long equity positions, which are summarized below. Of note are the following changes:

• New stakes in Virgin Media ($538MM), Tiffany ($188MM), Anadarko ($105MM), Thermo Fisher ($99MM), Cabot Oil and Gas ($84MM), Hess ($72MM) and others. Some of these overlap with the initiations of David Tepper and David Einhorn especially Hess: did some "idea dinners" take place in Q1 we were not aware of?
• Fully exited stakes in Tesoro, Morgan Stanley, Nexen, Symantec, Herbalife, Illumina, Coke, PVH, Abbott Labs and others.
• Reduced positions in Yahoo, AIG, New Corp, Murphy Oil, Delphi, Lyondell and others
• Added to stakes in International Paper, Abbvie, Dollar General, Constellation, and Ariad

History never changes. Or, at least it changes very slowly indeed. So here we are, like those before us, warning of our own Great Depression, of our own World War, or of even larger cycles like the fall of the English, Spanish, or Roman empires. And so far as we can tell, few listen and nothing changes. Why? Because it isn’t time. Understanding long-term cycles, and how they shape our spectrum of responses in periods of crisis and transformation is key to comprehending what is to come (and how we will allow it to affect us). Do you really think your ancestors didn’t see the Depression coming in 1921 or in 1929? Of course they did. The Balloon Option-ARM mortgage had just been invented, creating a housing boom larger and even more groundless as our own, immortalized by the Marx Brothers in The Cocoanuts. They warned the world then just as we do now, and no one listened then, just as they don’t now. Why? It wasn’t time.

So, apparently, according to Jon Hilsenrath, "QE to Infinity" is actually "finite" after all. There is no doubt that the Federal Reserve will do everything in its power to try and "talk" the markets down and "signal" policy changes well in advance of actual action.  However, that is unlikely to matter.  The problem with the financial markets today is the speed at which things occur.   High frequency trading, algorithmic programs, program trading combined with market participant's "herd mentality" is not influenced by actions but rather by perception. As stated above, with margin debt at historically high levels when the "herd" begins to turn it will not be a slow and methodical process but rather a stampede with little regard to valuation or fundamental measures. The reality is that the stock market is extremely vulnerable to a sharp correction.   Currently, complacency is near record levels and no one sees a severe market retracement as a possibility.  The common belief is that there is "no bubble" in assets and the Federal Reserve has everything under control. Of course, that is what we heard at the peak of the markets in 2000 and 2008 just before the "race for the door." This time will be no different.

I'm a selfish prick. A hot, rich, pampered intellectual with a big dick and a marathon tongue. I'm young enough to do it often and old enough to do it right.

• Hilsenrath: A Top Contender at the Fed Faces Test Over Easy Money (WSJ)
• Yen drops further as G7 avoids criticizing Japan (Reuters)
• Markets missed Flaherty’s clues on next Bank of Canada chief (G&M)
• Republicans turn screws over Tea Party tax probes (FT)
• Dual-track Libor replacement lined up (FT)
• Risks to China recovery seen as factory output underwhelms (Reuters)
• Barack Obama’s goal of universal healthcare could be set back significantly by Texas Governor Rick Perry (FT)
• Gold Bears Pull $20.8 Billion as BlackRock Says Buy (BBG)
• Mexico sets shelters as volcano shakes, spews ash (AP)
• Europe Eases Corporate Tax Dodge as Worker Burdens Rise (BBG)
• IPOs Set to Raise Most Cash Since Crisis (WSJ)
• Melting Ice Opens Fight Over Sea Routes for Arctic Debate (BBG)
• Top hedge funds bet on Greek banks (FT)
• Icahn Asks Investors to Make Big Bet on a Debt-Laden Dell (BBG)

In a weekend dominated by discussion of the "Taper Tantrum", i.e., interpretations of what Hilsenrath "said" after the close on Friday, what the Fed wanted him to say, what the market's response to what he said or did not say would be, and what the next steps may be, we present this convenient annotation of Hilsenrath's complete recital courtesy of Mike O'Rourke from Jones Trading.

The Chairman is about to take the lectern to discuss bank structure and competition at the SIFI conference at the Chicago Fed. His prepared remarks are likely to be a little less exciting than the Q&A where the world will be watching for the words "buy, buy, buy", "mission accomplished", or "taper". Charles Evans will be his lead out man. Finally, since Bernanke will be discussing shadow banking, or the source of some $30 trillion in shadow money always ignored by Keynesians, Monetarists and Magic Money Tree (MMT) growers, a topic we have discussed over the past three years, here is the TBAC's own summary on how Modern Money really works.

Normally the New York Fed would not have to bother itself with such Series 7, 63-registration requiring, "financial advisor"-type things as predicting where the stock market will go, especially when it is its own trading desk that provides the impetus for more than 100% of the current equity rally. However, these are not normal times - they are New Normal. And as a result, Fed economists Fernando Duarte and Carlo Rosa have penned a "research" paper titled "Are Stocks Cheap?" in which they view the same reflexive "evidence" that Ben Bernanke himself used to answer a question during a recent press conference if he would still be buying stocks at record levels, namely the risk premium. This is what the NYFed's economists say on the matter: "We surveyed banks, we combed the academic literature, we asked economists at central banks. It turns out that most of their models predict that we will enjoy historically high excess returns for the S&P 500 for the next five years."

The U.S. stock market rally has recently passed its fourth anniversary after the terrifying lows of March 2009. During that time, massive and unconventional reflationary policy from the Federal Reserve has managed to lift the S&P 500 to new all-time highs. But perhaps even more improbably, it has finally (for now?) built a floor under U.S. residential real estate prices. This 'Less Bad' Recovery continues in other ways as well. Jobs have been created. Not good jobs. Not high paying jobs. Not full time jobs. But some rudimentary sets of tasks and responsibilities that could be called jobs. There has also been deleveraging. But here, too, the scale of debt reduction is nothing close to the unadjusted figures often touted in the media. Americans, and more generally, OECD citizens, remain highly burdened by debt. When combined with poor wage growth, this explains the continued suppressed demand so pervasive in developed nations. And of course, oil prices – as expressed through prices at the pump – remain stubbornly elevated and are likely to persist at their new elevated level. Combined, these factors have kept a lid on consumer confidence and make for a precarious disparity between the stock market and the real economy. Welcome to the Great Constraint - a growing failure to thrive.