Last week, Federal Reserve Chairman Janet Yellen testified before Congress for the first time since replacing Ben Bernanke at the beginning of the month. Her testimony confirmed what many of us suspected, that interventionist Keynesian policies at the Federal Reserve are well-entrenched and far from over. Isn't it amazing that the same people who failed to see the real estate bubble developing, the same people who were so confident about economic recovery that they were talking about “green shoots” five years ago, the same people who have presided over the continued destruction of the dollar's purchasing power never suffer any repercussions for the failures they have caused?
“Guidance” is the new organizing credo of US financial life with Janet Yellen officially installed as the new Wizard of Oz at the Federal Reserve. Guidance refers to periodic cryptic utterances made by the Wizard in staged appearances before congress or in the “minutes” (i.e. transcribed notes) from meetings of the Fed’s Open Market Committee. The cryptic utterances don’t necessarily have any bearing on reality, but are issued with the hope that they will be mistaken for it, especially by managers in the financial markets where assets are priced and traded.
Those of our readers focused on the state of the housing market will undoubtedly remember this chart we compiled using the data from the largest mortgage originator in the US, Wells Fargo. In case there is some confusion, as a result of rising interet rates (meaning the Fed is stuck in its attempts to push rates higher), the inability of the US consumer to purchase houses at artificially investor-inflated levels (meaning housing is now merely a hot potato flipfest between institutional investors A and B), and the end of the fourth dead-cat bounce in housing (meaning, well, self-explanatory), the bank's primary business line - offering mortgages - is cratering. So what is a bank with a limited target audience for its primary product to do? Why expand the audience of course. And in a move that is very much overdue considering all the other deranged aspects of the centrally-planned New Normal, in which all the mistakes of the last credit bubble are being repeated one after another, Reuters now reports that the California bank "is tiptoeing back into subprime home loans again."
We at the Fed are the platonic guardians of the global financial system. And our logic is undeniable….
The concept of continuously doubling down in order to achieve financial and economic goals is now a respectable and established norm. Takahashi’s Wager of 1930s Japan shows that such a policy, while initially successful, can remove all sensible restraints. On the surface ‘Gamblernomics’, like the ‘Takahashi Wager’, appears successful - the equity market has risen substantially, the currency has fallen, and government bond yields remain low. So far, so good. How is the government gauging the success of this dice roll? They are looking for two percent inflation, a positive growth number, and have committed to two years of massive QE to achieve these goals. As time passes and these targets are not met, the policy makers will double down again, by which point interest payments and welfare spending are likely to comprise most of the budget.... Today’s adherents of ‘Gamblernomics’ are not only found in Tokyo, but also reign in all major financial capitals, each playing their own version of a similar wager. All believe that doubling down is a sober strategy given the sunk costs of lost growth. As a new generation of gamblers sit at the table, ghosts of gamblers past whisper - “Place your bets.”
People Powered Privacy Savior ... Or Honey Trap Pushed By the Central Banks and TBTF?
XKCD published this cartoon in reference to ESPN and the like, but it’s even more applicable to CNBC and its ilk. Just to be clear, I’m not slamming these hosts and traders. I’m sure that they are overwhelmingly smart, honest people who believe that what they say are useful truths from their own perspectives. They are not hypocrites. But they are performers. And like any performer, there is a larger game being played with their words. The larger meaning of the statements made on CNBC has absolutely nothing to do with specific investment advice or news. CNBC really could not care less about the actual content of what is being said. The purpose of CNBC’s game is not to tell you WHAT to think, but HOW to think, that thinking about investing in terms of some sell-side analyst’s anodyne story about fundamentals or some trader’s breathless story about open option interest is smart or wise or what all the cool kids are doing. Why? Because CNBC can create inexpensive content essentially at will to fill this demand, allowing them to sell advertisements and take cable carriage fees.
"Many will remember Ben Bernanke for classic central bank stabilizing actions taken during the fall 2008 panic, including emergency loans to banks and swap lines to foreign central banks. But historians might also consider actions the Fed took before and after that panic...
Many argue that QE has not reduced unemployment, but has diminished the Fed’s independence and credibility, offsetting the effects of adopting a numerical inflation target. Now, only a year after the latest round of QE began, the Fed is struggling with how to unwind it, just as many had warned."
Last week brought two important pieces of news: one deceptive, the other fraudulent. The deceptive news was that the Fed, in its last Ben Bernanke moment, would stay the course. The fraudulent news was that US economy grew at a 3.2% annualized pace in the last quarter of 2013. We're still in the weakest recovery since the end of World War II. But since 1950, the composition of the US economy has changed so substantially that GDP 'growth' no longer means what it used to mean...
Miserable? Feeling like you want to turn the corners of the smiley down so it reflects your current mood? Believe you would get the lead role in the Les Misérables?
Reality will reassert itself in 2014, with lemmings, flippers, and hedgies getting slaughtered as the housing market comes back to earth with a thud. The continued tapering by the Fed will remove the marginal dollars used by Wall Street to fund this housing Ponzi. The Wall Street lemmings all follow the same MBA created financial models. They will all attempt to exit the market simultaneously when their models all say sell. If the economy improves, interest rates will rise and kill the housing market. If the economy tanks, the stock market will plunge, creating fear and killing the housing market. Once it becomes clear that prices have begun to fall, the flippers will panic and start dumping, exacerbating the price declines. This scenario never grows old.
Who stole the people's money?
A classicial economist... and Harvard professor... preaching to the world that one's money is not safe in the US banking system due to Ben Bernanke's actions? And putting his withdrawal slip where his mouth is and pulling $1 million out of Bank America? Say it isn't so...
17 years ago, the first major Emerging Market crisis started in Thailand, leading to the Russian default and the collapse of LTCM ushering in the era of Too Big To Fail. This time, all the world needed for the second major EM crisis, was for Ben Bernanke to announce he is giving global central planning a break (because one can be certain the Untaper will be right back on the agenda as soon as the S&P enters a bear market). Ironically, Thailand has largely been insulated from the EM decimation, even through it is now in as bad a political shape as it ever was, and one day ahead of the February 2 general elections things are getting from bad to worse. AFP reports that explosions and heavy gunfire rattled Bangkok Saturday as pro- and anti-government protesters clashed on the eve of controversial Thai elections seen as unlikely to end a cycle of violence in the kingdom after months of opposition rallies.
It’s fairly clear if you look at the data objectively that Mr. Bernanke’s policies have left the Fed (and consequently the global financial system) in far more precarious condition than when he started, yet disproportionately benefited the US government and small percentage of society at the expense of everyone else. This is not to say that Mr. Bernanke is some evil mastermind bent on nefarious ends. Unfortunately the road to ruin is almost always paved with good intentions.