Ben Bernanke

As the world's equity markets prepare to rally on the back of yet more central bank printing as Japan's Shinzo Abe takes the helm with a 2% inflation target and a central bank entirely in his pocket, The Telegraph's Ambrose Evans-Pritchard suggests a rather concerning analog for the last time a Japanese prime-minister attempted to salvage his deflation/depression strewn nation. The 1930s 'brilliant rescue' by Korekiyo Takahashi, who removed Japan from the Gold Standard, ran huge 'Keynesian' budget deficits intentionally, and compelled the Bank of Japan to monetize his debt until the economy was back on its feet managed to devalue the JPY by 60% (40% on a trade-weighted basis). Initially this led to exports rising dramatically and brief optical stability, but the repercussion is the unintended consequence (retaliation) that the world missed then and is missing now. Though the economy appeared to stabilize, the responses of other major exporting nations, implicitly losing in the game of world trade, caused Japan's policies to backfire, slowed growth and left a nation needing to chase its currency still lower - eventually leading to hyperinflation in Japan (and Takahashi's assassination). With no Martians to export to, why should we expect any difference this time? and how much easier (and quicker) are trade flows altered in the current world?

It’s all a money game on Wall Street.

Germany is now openly telling the Fed that it is done playing around. This will have severe consequences in the financial system.

Today at 4pm Eastern, Ben Bernanke, at the University of Michigan’s Ford School of Public Policy, will take live questions from Twitter for the first time as part of the Fed's new policy of openness. Of course, the policy won't be so open for him to answer if banks are actually using reserves as prop trading funding (as was the case with JP Morgan, and any other bank which realizes that when it comes to fungible cash, money is just 1s and 0s in a server somewhere). However, the filter may slip and at least one or two good questions may slip through. So please take this opportunity to submit any pressing questions you may have on the Fed's policy to pump the market to new stratospheric highs courtesy of $85 billion (for now) in monthly reserve injections into the Primary Dealers, by using the #fordschoolbernanke tag to your questions. For convenience, we have appended a twitter module below that captures all tweets with that querry.

The Central Bank of Ireland continues to be queried about the status of the Irish gold reserves. It has been reluctant to release information and said that it is “not obliged” to release information due to certain “rules and regulations”.  Ireland's finance minister, Michael Noonan, has also been asked about the country's gold vaulted at the Bank of England, such as whether the gold is held in allocated form with a bar list available and whether the gold is leased out into international markets. Answers are as of yet not forthcoming. The Sunday Independent, Ireland’s best selling Sunday broadsheet covered the story yesterday in an article (see news) published yesterday which is being widely shared on the internet and commented upon: Bankrupt Ireland owns six tonnes of gold, the bulk of which is held at the Bank of England, it has been revealed. The Central Bank of Ireland said the value of its gold holdings was €235m last time it checked. This represents just over 1 per cent of its total investments. A spokeswoman said the Central Bank was a party to the Washington Agreement on Gold, which recognised gold as an important element of global monetary reserves. She said the Central Bank had not entered into any lease arrangements regarding any of its gold but would not provide specific details of its storage arrangements with the Bank of England.

The question many of us had going into today was whether the no follow-through allowed rule would be implemented yet again by The Gold Cartel for the zillionth time in a row.

• WSJ picks up on excess "deposits over loans" theme, reaches wrong conclusion: Wads of Cash Squeeze Bank Margins (WSJ)
• SAC Is Bracing for Big Exodus of Funds (WSJ)
• Japan unveils Y10.3tn stimulus package (FT)
• China’s Inflation Accelerates as Chill Boosts Food Prices (BBG)
• Berlusconi Denies Responsibility for Italy Crisis (BBG)
• Fed hawks worry about threat of inflation (Reuters)
• And then the lunatics: Fed easing may not be aggressive enough: Kocherlakota (Reuters)
• BOJ Likely to Take Easing Steps (WSJ)
• Draghi Shifts Crisis Gear as ECB Focuses on Economy Inbox (BBG)
• Argentina Bondholders Lose Bid to Get State-Court Review (BBG)
• Regulators Find Major Euribor Shortcomings (WSJ)
• Basel III Punishes Dutch Over Risk That Isn’t (BBG)
• Bondholders in Crosshairs as Merkel Travels to Cyprus (BBG)

In light of this evening's entertainment from Paul Krugman, we thought QBAMCO's Paul Brodsky's view of the present debt-ceiling policy-through-the-looking-glass extremely apropos. Speaking of monetary abstractionism, there has been recent talk of a fiscal gimmick called “The Trillion Dollar Coin,” in which a platinum coin valued at $1 trillion would be created by the U.S. Mint for the Treasury Department. Treasury would then rid itself of its pesky fiscal deficit in one fell swoop by simply keeping the coin on deposit at the Fed. The TDC idea is a marvel of political imagination and public ignorance. Obviously, the TDC idea is a political ploy with a targeted mission: to rid the US Treasury of its debt ceiling, which is an increasingly frequent and embarrassing public reminder of government ineptitude. Everyone knows government-led de-levering is not a serious threat. However, the irony of the scheme and its MMT (Modern Money Theory, is espoused by imaginative economists technically proficient in double-entry bookkeeping and deficient in confidence that free marketplaces can provide accurate valuations) / liberal Keynesian promoters could not be more delicious. The scheme exposes the forty year-old charade, otherwise known as the global monetary system, better than any mind-exercise we have been able to come up with.

Today, to little fanfare, the Fed announced a major binding settlement with the banks over robosigning and fraudclosure, which benefited the large banks, impaired the small ones (which is great: room for even more consolidation, and even more TBest-erTF, which benefits America's handful of remaining megabanks), and was nothing but one minor slap on the banking sector's consolidated wrist involving a laughable $3 billion cash payment. As part of the settlement, the US public is expected to ignore how much money the banks actually made in the primary and secondary market over the years courtesy of countless Linda Greens and robosigning abuses. A guess: the "settlement" represents an IRR of some 10,000% to 100,000% for the settling banks. We are confident once the details are ironed out, this will be an accurate range.  Yet what is most disturbing, or not at all, depending on one's level of naivete, is the response of Elijah Cummings, ranking member of the house Committee on Oversight and Government Reform. As a reminder, Congress had demanded that the settlement not be announced before there was a hearing on it. This did not even dent the Fed's plans to proceed with today's 11 am public announcement which can now not be revoked. It is Cummings' response which shows, yet again, just who is the true master of the Federal Reserve.

2012 is a year most asset managers would like to forget. With the S&P returning 16% and Russell 2000 up 16.3%, on nothing but multiple expansion in a world where risk has been eliminated despite persistently declining revenues and cash flows, a whopping 88% of hedge funds, as well as some 65% of large-cap core, 80% of large cap value, and 67% of small-cap mutual funds underperformed the market, according to Goldman's David Kostin. The ongoing absolute outperformance of mutual funds over their 2 and 20 fee sucking hedge fund peers is notable, as this is the second or perhaps even third year in a row it has happened. And while the usual excuse that hedge funds are not supposed to beat the market but a benchmark, and generally protect capital from downside risk is valid, it is irrelevant if any downside risk (see ongoing rout in VIX and net position in the VIX futures COT update) is now actively managed by central banks both directly and indirectly, their HF LPs no longer see the world in that way. In fact as Bloomberg Market's February issue summarizes, some 635 hedge funds closed in 2012, 8.5% than a year earlier, despite a far stronger year for the general indices. The reason: LPs and MPs have simply had enough of holding on to underperformers and get swept up in the momentum of performance chasing, and the result is redemption requests into funds who may have had a positive benchmark year, but underperform relative to the S&P for two or more years, which nowadays is the vast majority of funds.

It took the WSJ's Jon Hilsenrath, who one more time is modestly relevant in a world in which QE is implied until infinity or until the Fed loses all control of the money creation process, 12 whopping minutes to release a 589-word article analyzing the FOMC minutes. At least we know one of the people who had the embargoed version hours ago. We are confident he did not leak their content to anyone. Hilsenrath's prepared take: "A new fault line has opened up at the often-divided Federal Reserve: When to halt the bond-buying programs that are adding $85 billion a month of Treasury and mortgage securities to the central bank's assets. Minutes of the Fed's Dec. 11-12 policy meeting showed that officials were divided about when to halt the programs, with a few wanting to continue them until year-end, several others wanting to end the programs well before then and some wanting to halt them right away. While exposing the rift, the minutes left little clear indication which course the central bank would choose. In its official policy statement, it has been saying since September that it would continue the bond-buying programs until the job market substantially improves...  It is a hugely consequential decision for the Fed and likely the next big challenge for Ben Bernanke in what could be his final year at the helm of the central bank, where he has been chairman since 2006."

Back in April 2012, in "How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement" we first explained how despite its best intentions (to boost the Russell 2000 to new all time highs, a goal it achieved), the Fed's now constant intervention in capital markets has achieved one thing when it comes to the real economy: an unprecedented capital mismanagemenet, where as a result of ZIRP, corporate executives will always opt for short-term, low IRR, myopic cash allocation decisions such as dividend, buyback and, sometimes, M&A, seeking to satisfy shareholders and ignoring real long-term growth opportunities such as R&D spending, efficiency improvements, capital reinvestment, retention and hiring of employees, and generally all those things that determine success for anyone whose investment horizon is longer than the nearest lockup gate. Today, one calendar year later, none other than Bill Gross, in his first investment letter of 2013, admits we were correct: "Zero-bound interest rates, QE maneuvering, and “essentially costless” check writing destroy financial business models and stunt investment decisions which offer increasingly lower ROIs and ROEs. Purchases of “paper” shares as opposed to investments in tangible productive investment assets become the likely preferred corporate choice." It is this that should be the focus of economists, and not what the level of the S&P is, as it is no longer indicative of any underlying market fundamentals, but merely how large, in nominal terms, the global balance sheet is. And as long as the impact of peak central-planning on "business models" is ignored, there can be no hope of economic stabilization, let alone improvement. All this and much more, especially his admissions that yes, it is flow, and not stock, that dominates the Fed market impact (think great white shark - must always be moving), if not calculus, in Bill Gross' latest letter.

As we forecast back in November, it is now official that the House will not vote on any deal out of the Senate, assuming there is one, later today, which means America will officially slide off the Fiscal Cliff. And now cue everyone being very hopeful and optimistic a deal will get done momentarily, if not sooner, in 2013. Of course, we all know just how far optimism takes America's dysfunctional Congress. The biggest irony in all of this is that the only winners today were the much hated "1%"-ers, whose taxes may or may not go up, who just got to book major year end profits on this last minute ramp. The remainder of America's population can quietly look forward to 2013 with "hope" and "optimism" that in 2013 Congress will finally stop being dysfunctional. Good luck. Oh, and before we forget, America just breached its debt ceiling: now the pillaging of various government retirement funds begins.

When it comes to the decisions made by a group of academics behind closed doors to keep the stock market in nominal terms up at all costs (nevermind such trivial matters as the jobless rate, inflation, i.e., those things they are tasked with), one would think they are based on the bubblicious ramblings of one Ben Bernanke, or Charles Evans, or even one Janet Yellen. One would be very wrong. As it turns out the real decisions that determine the value of paper money (laughable as it is), and thus billions of people in the world, are all in the virtual hands of the following three entities: Ferbus, Edo and Sigma. These are "computer-modeling programs the central bank uses to make predictions about how various policies and events will play out across the economy....The Fed's main economic model, launched in 1995, is called FRB/US, pronounced "Ferbus." It uses hundreds of different mathematical equations to describe how the economy works. " Brilliant. And as Hilsenrath himself adds further on, "The models are deeply flawed. They failed to foresee the financial crisis in 2008 and have tended to overestimate the strength of the economy for several years." Hilsenrath then goes on to pose a very rhetorical question: "Could they fail the Fed again?" The answer is painfully obvious to anyone who has been on the receiving end of the Fed's endless attempts to blow a credit bubble always and forever. And just in case it is not obvious, let's just remind everyone that "subprime is contained."

It's not even 6 pm yet (futures open time) and all that early optimistic momentum hard procured by splinter GOP Senators, is slowly but surely, being extinguished. Enter Dick Durbin, the second ranking Senate democrat: 

• Even if budget agreement to avoid fiscal cliff is reached today, it would be tough to “put it together this evening,” Sen. Dick Durbin, D-Ill., tells CNN.
• If deal reached, more likely to be made final tomorrow, he says
• Original terms of budget deal present “problem”
• Hopeful “common ground” can be reached

So let's set the ground rules for tonight's drinking game...