When it comes to building wealth, muddying the difference between perception and reality is the key manipulation tool that banksters use to goad people into wrong choices.
America is now exactly 5 months away from the day the US Fiscal cliff will crater the economy unless a Congress which has never been as partisan as it is currently agrees to collaborate and delay the day of reckoning. This is very unlikely to happen before the presidential elections for obvious reasons, and it is even more unlikely to happen after the elections when politicians demonstrate just why the term "graceful loser" has never existed when describing what happens in D.C. So what would happen to the US economy if and when January 1, 2013 rolls in and nothing has changed, and how does this differ from the consensus? The chart below from BofA answers that particular question, and brings up a new one: even if the Fed goes ahead with more NEW QE today or in September, if the "cliff" consensus really is as wrong as it very well may be, will the Fed have no choice but to follow up its easing at this FOMC meeting or the next with another one immediately following? And is this precisely the one consideration for Ben Bernanke, who realizes very well that if financial conditions, read the Russell 2000, are relaxed just in time for the crucial decision on Bush Tax Cut extension, then absolutely nothing will happen, forcing the Fed to continue being the sole source of "stimulus" in America. Of course, in that case expect nothing from the Fed not only in in August and September, but well into 2013.
Anyone who paired a corn/wheat long in July while shorting the "natural" hedges Spain and China (a painfully obvious trade in retrospect, maybe) can now take the rest of the year off. Everyone else will have to continue trying to frontrun Ben Bernanke for a few more months.
There are only three words that send a chill down the spine of Ben Bernanke - Ron, Paul, and Deflation. His life's work is devoted to the avoidance-at-all-costs of the latter (and probably the former in reality). As we discussed here two weeks ago, his actions in extreme monetary policy have all occurred at periods when the market's expectations of future rapid de- or dis-inflation have increased rapidly. As we noted then: without inflation break-evens dropping, the Bernanke put will not arrive; but the market in its infinitely efficient wisdom has created a self-defeating spiral of BTFD reflexive front-running on any rapid spike down in future inflation expectations - which implicitly sparks a non-dis-inflationary reaction and removes Bernanke's punchbowl for another day. This has occurred 4 times this year - with this week's early plunge being caught by Draghi and Hilsenrath - and with inflation break-evens almost at their highest in 10 months, it would appear the 'desperate-not-to-miss-the-life-giving-rally' market just removed its own blood supply.
Will the Fed then just keep printing forever and ever? As an aside, financial markets are already trained to adjust their expectations regarding central bank policy according to their perceptions about economic conditions. There is a feedback loop between central bank policy and market behavior. This can easily be seen in the behavior of the US stock market: recent evidence of economic conditions worsening at a fairly fast pace has not led to a big decline in stock prices, as people already speculate on the next 'QE' type bailout. This strategy is of course self-defeating, as it is politically difficult for the Fed to justify more money printing while the stock market remains at a lofty level. Of course the stock market's level is officially not part of the Fed's mandate, but the central bank clearly keeps a close eye on market conditions. Besides, the 'success' of 'QE2' according to Ben Bernanke was inter alia proved by a big rally in stocks. But what does printing money do? And how does the self-defeating idea of perpetual QE fit with the Credit Cycle relative to Government Directed Inflation (or inability to direct inflation where they want it in the case of the ECB and BoE)?
Not seeing many fiscal developments that would prompt significant bullish action...
While some have talked of the 'credit-easing' possibility a la Bank of England (which Goldman notes is unlikely due to low costs of funding for banks already, significant current backing for mortgage lending, and bank aversion to holding hands with the government again), there remains a plethora of options available for the Fed. From ZIRP extensions, lower IOER, direct monetization of fiscal policy needs, all the way to explicit USD devaluation (relative to Gold); BofAML lays out the choices, impacts, and probabilities in this handy pocket-size cheat-sheet that every FOMC member will be carrying with them next week.
Just like last time around when stocks were plunging with no knight in shining armor in sight, until the Fed's faithful mouthpiece-cum-scribe Jon Hilsenrath showed up with a report, subsequently disproven, that more QE is coming minutes before the market close on July 6, so today stocks appeared poised for a precipice until some time after 3 pm it was leaked that none other than Hilseranth once again appeared, at precisely 3:55 pm, with more of the same. Ironically, the market only saw the word Hilsenrath in the headline, and ignored the rest. The irony is that this time around the Fed's scribbler said nothing that we did not know, namely that the Fed can do something in August, or it may do something in September, or it may do nothing, none of which is actually news.
A few weeks ago America had to go through the supreme political theater that was the SCOTUS' unprecedented and uber-political decision on Obamacare, which in attempting to overcome allegations of partisanship, only succeeded in reinforcing these even deeper. Now, with everyone expecting Bernanke to launch QE every time there is a 1% downtick in the Russell, our honorable Chairsatan is in the same position: he needs to do something but can not afford to appear political with the presidential election just over 3 months away. In other words, from the soap opera about the Supreme Court of the US, we now move to the one about the Supreme Federal Reserve of the US. And the trouble for those whose investment strategy is hope and prayer is that the Fed is becoming aware of this reflexive phenomenon, and just for that reason may delay QE until September, by which point the US, and global economy, will be in freefall.
Too Big Leads To Destruction of the Rule of Law
I am fairly certain the answer to why Bernanke isn’t increasing inflation when his former self and former colleagues say he should be is actually nothing to do with domestic politics, and everything to do with international politics. Most of the pro-Fed blogosphere seems to live in denial of the fact that America is massively in debt to external creditors — all of whom are frustrated at getting near-zero yields (they can’t just flip bonds to the Fed balance sheet like the hedge funds) — and their views matter, very simply because the reality of China and other creditors ceasing to buy debt would be untenable. Why else would the Treasury have thrown a carrot by upgrading the Chinese government to primary dealer status (the first such deal in history), cutting Wall Street’s bond flippers out of the deal?
Consumers are paying an easy $35 dollars per barrel over what they would otherwise dole out for a barrel of oil if fund managers didn`t use the benchmark futures contracts as their own personal ATMs.
This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied - The SequelSubmitted by Tyler Durden on 07/19/2012 19:05 -0400
Two years ago, in January 2010, Zero Hedge wrote "This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied" which became one of our most read stories of the year. The reason? Perhaps something to do with an implicit attempt at capital controls by the government on one of the primary forms of cash aggregation available: $2.7 trillion in US money market funds. The proximal catalyst back then were new proposed regulations seeking to pull one of these three core pillars (these being no volatility, instantaneous liquidity, and redeemability) from the foundation of the entire money market industry, by changing the primary assumptions of the key Money Market Rule 2a-7. A key proposal would give money market fund managers the option to "suspend redemptions to allow for the orderly liquidation of fund assets." In other words: an attempt to prevent money market runs (the same thing that crushed Lehman when the Reserve Fund broke the buck). This idea, which previously had been implicitly backed by the all important Group of 30 which is basically the shadow central planners of the world (don't believe us? check out the roster of current members), did not get too far, and was quickly forgotten. Until today, when the New York Fed decided to bring it back from the dead by publishing "The Minimum Balance At Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market FUnds". Now it is well known that any attempt to prevent a bank runs achieves nothing but merely accelerating just that (as Europe recently learned). But this coming from central planners - who never can accurately predict a rational response - is not surprising. What is surprising is that this proposal is reincarnated now. The question becomes: why now? What does the Fed know about market liquidity conditions that it does not want to share, and more importantly, is the Fed seeing a rapid deterioration in liquidity conditions in the future, that may and/or will prompt retail investors to pull their money in another Lehman-like bank run repeat?
- U.S drought wilts crops as officials pray for rain (Reuters)
- Obama backs aid for drought farmers (FT)
- Greek leaders identify two-thirds of spending cuts (FT)
- Central bankers eyeing whether Libor needs scrapping (Reuters)
- Markets Face a Life Sentence of Hard Libor (WSJ)
- World Bank chief warns no region immune to Europe crisis (Reuters)
- China big four banks' new loans double in early July (Reuters)
- Nokia Loss Widens as Smartphone Sales Slump (WSJ)
- Bundesbank Expected To Buy Australian Dollars In 3Q (WSJ)
CNBC's Rick Santelli is goaded into responding to the easing-based hope that is driving stock prices and levitating every risk asset class. "Enough is enough", he notes, quoting Volcker's recent comments, "as we have to let the economy sink or swim on its own at this point." Liesman's responds by stepping away a little from his comments as he leaves Bernanke alone believing that QE will do some good at the margin (while the economic reporter remains less sure). Implicit in his downgrade of the economy is an increase in the probability of additional QE and retail sales sank the ship. A little later in this brief clip, Rick goes full-Santelli - feeling the need to add a third pillar to the Fed's mandate "if we see something wrong in the market, it's our job to do something about it" with Bernanke's response being "it's not my job". Critically, Rick notes, "if anybody listening or watching right now ever thinks that more regulators will ever stop anything, you have to watch Ben Bernanke - appears to be an honest guy and straightforward though I don't always agree with him - saying 'it's not my job. I don't regulate that.' unbelievable!" The CYA, not-my-problem, someone-else-did-it, keep-my-job mentality when it's front-and-center in the most powerful financial entity in the world is deplorable.