St Louis Fed

This objective report concisely summarizes important macro events over the past week.  It is not geared to push an agenda.  Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases. Also - from Citi's Steven Englander - what to worry about from this weekend's G-20 extravaganza...

According to dictionary.com, Deflation is “a fall in the general price level or a contraction of credit and available money.” Falling prices. That sounds good, especially if you have set some cash set aside and are thinking about a major purchase. But as some additional research with Google would seem to demonstrate, that would be a naïve and simple-minded conclusion. According to received wisdom, deflation is a serious economic disease - St.Louis Fed: "...discourages spending and investment because consumers, expecting prices to fall further, delay purchases, preferring instead to save and wait for even lower price..." The problem with deflation, then - we are told, is that it feeds on itself, destroying the economy along the way. Deflation is far worse than its counterpart, inflation, because the Fed can fight inflation by raising interest rates. Deflation is nearly impossible to stop once it has started because interest rates can only be cut to zero, no lower. In case you’re not already scared straight, the deflationary doomsday has already happened in America when (according to the New York Times) it caused the Great Depression. I hope that everyone is clear on this. Now that you understand the basics, I have some questions for the people who came up with this stuff.

Back in June 2011 Zero Hedge broke a very troubling story: virtually all the reserves that had been created as a result of the Fed's QE2, some $600 billion (which two years ago seemed like a lot of money) which was supposed to force banks to create loans and stimulate the US (not European) economy, ended up becoming cash at what the Fed classifies as "foreign-related institutions in the US" (or "foreign banks" as used in this article) on its weekly update of commercial banks operating in the US, or said simply, European banks..... With the Fed's open-ended QE in place for over 3 months now, or long enough for the nearly $200 billion in MBS already purchased to begin settling on Bernanke's balance sheet, we decided to check if, just like during QE2, the Fed was merely funding European banks' US-based subsidiaries with massive cash, which would then proceed to use said fungible cash to indicate an "all clear" courtesy of Bernanke's easy money. Just like in 2011.

The answer, to our complete lack of surprise, is a resounding yes.

No commentary necessary, although we will add one word: "unsustainable." We will also add that apparently not one economist could factor the simplest human behavioral response: "hey, lets pay ourselves dividends today to avoid the dividend tax hike tomorrow" into their models, which is why reality smashed the "estimate" by about 6 standard deviations. Ah, economists.

As soon as the much-weaker-than-expected GDP print hit the tape this morning, precious metals began to rise. Led by Silver, it appears the physical demand of recent weeks is creeping into the reality of prices (suppressed or otherwise) as bad is good enough for moar help from Ben and his buddies. The upward move in the PMs is as good a predictor of what to expect (i.e., not even a hint of tightening) as the sell-side crew, which is expecting merely another boring FOMC statement - as Goldman notes, following the substantial policy changes announced in December - including the shift to outcome-based forward guidance and the introduction of open-ended Treasury purchases - Goldman expects the January meeting will likely be relatively uneventful with few changes to the economic assessment.

We could bore readers with the details of the just announced New Homes Sales data from the Census Bureau, which put a somewhat largish dent in the "undisputed" housing recovery fairytale taking place in America (perhaps in the Hamptons, and triplexes in Manhattan where the NAR continues to launder Chinese and Russian oligarch money).... or we could just show this chart of the non-seasonally adjusted, unannualized New Home Sales in the past decade, and ask: just where is this recovery everyone keeps on talking about?

If there was any debate whether the Fed's policies have helped the economy or just the market (and specifically the Bernanke-targeted Russell 2000), the following two charts will end any and all debate. As the following chart from the St Louis Fed shows, as of the just completed quarter, US GDP "growth" since the "recovery" is now the worst in US history, having just dipped below the heretofore lowest on record.

Currency wars have captured the imagination of many. However, the modern history of the foreign exchange market demonstrates that is has always been an arena in which nation-states compete. Typically central banks want the currency's exchange rate to affirm not contradict monetary policy. The synchronized crisis and easier monetary policy makes it appear that nearly ever one wants a weak currency. Yet most officials are on low rungs of the intervention escalation ladder. Moreover, there is no sign of it spilling over to a trade war. Has any one else noticed that Japan's largest trading partner and regional rival China has been quiet, not joining the the chorus of criticism?

• 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)

Fed mouthpieces Bullard and Lacker are out in force this morning talking the market back from the edge of yesterday's FOMC Minutes and reassuring us that the economy is going to be weak enough for a lot longer to justify the Fed's actions. However, right at the end of Jim Bullard's interview with CNBC's Steve Liesman, we got a glimpse of the reality behind the curtain as the St. Louis Fed president threw Bernanke under the purge-ry perjury bus... Following a discussion of fiscal policy uncertainty and the need to carefully spend what money we have, Liesman jokingly commented to Bullard that it is "Easy for you to say, you have a lot of dollars to spend; you get to print them!" To which the now foot-in-mouth Bullard replied, "Aaahh; indeed we do." This seems a little different from what Bernanke previously told Congress.

A month ago, we showed something disturbing: the weekly increase in savings deposits held at Commercial banks soared by a record $132 billion, more than the comparable surge during the Lehman Failure, the First Debt Ceiling Fiasco (not to be confused with the upcoming second one), and the First Greek Insolvency. And while there were certainly macro factors behind the move which usually indicates a spike in risk-aversion (and at least in the old days was accompanied by a plunge in stocks), a large reason for the surge was the unexpected rotation of some $70 billion in savings deposits at Thrift institutions leading to a combined increase in Savings accounts of some $60 billion. Moments ago the Fed released its weekly H.6 update where we find that while the relentless increase in savings accounts at commercial banks has continued, rising by another $70 billion in the past week, this time there was no offsetting drop in Savings deposits at Thrift Institutions, which also increased by $10.0 billion. The end result: an increase of $79.3 billion in total saving deposits at both commercial banks and thrifts, or an amount that is only the third largest weekly jump ever following the $102 billion surge following Lehman and the $92.4 billion rotation into savings following the first US debt ceiling debacle and US downgrade in August 2011.

When people think of the conventional battery of options the BLS applies to fudge the monthly payrolls number, the labor force participation is the first thing that comes mind: after all the thesis is that old workers are increasingly dropping out of the labor force and retiring. Nothing could be further from the truth as can be seen in this chart of workers aged 55-69, i.e. the prime retirement age. But perhaps a far more important secular issue is the complete lack of pickup in the prime worker demographic, those aged 25-54, which in November dropped by 400k to 94 MM. This is a level first breached in April 1997, in other words in the past 15 years not a single incremental job has been gained in this most productive and lucrative of age groups!

Here's 'Buck' to explain, in plain English, "one of the most complex 'but effective' institutions in the United States - The Federal Reserve System". Whether you view for the pure irony of it - or pass on to an Econ PhD friend, this animated cartoon from the St. Louis Fed (funded by our cliff-invoked taxpayer money we are sure) takes us from inception around one hundred years ago to the present-day and covers the three divisions (Reserve Bank, FOMC, and Board of Governors) and three responsibilities (providing financial services, conducting monetary policy, and supervising banks). It seems 'Buck' had not been informed of the other and varied roles the Fed plays in the world's populations' lives. How long before this is required viewing for all K-12 schools nationwide?

• Two weeks ago here: The Latest Greek "Bailout" In A Nutshell: AAA-Rated Euro Countries To Fund Massive Hedge Fund Profits... and now on Bloomberg: "Hedge Funds Win as Europe Will Pay More for Greek Bonds" (BBG)
• Oracle sends shareholders cash as tax uncertainty looms (Reuters)
• GOP Makes Counteroffer In Cliff Talks (WSJ)
• Iran says captures U.S. drone in its airspace (Reuters)
• IMF drops opposition to capital controls (FT)
• Vogue Editor Wintour Said to Be Possible Appointee as U.K. Envoy (BBG)
• Juncker Stepping Down French Finance Minister to Head Euro Group? (Spiegel)
• Australia cuts rates to three-year low (FT)
• Europe’s banking union ambitions under strain (Reuters)
• EU Nations Eye New ECB Bank Supervisor Amid German Doubts (BBG)
• Frankfurt's Ambitions Get Cut Back (WSJ)
• House Republicans Propose $2.2 Trillion Fiscal-Cliff Plan (BBG)

Perhaps the Bureau of Economic Analysis was hoping that today's cornucopia of ugly income and spending data would be enough for those who keep track of the US government's Department of Truth shennanigans and ignore the meat behind the numbers. Whatever the reason, the real story in today's Personal Spending data was not the consumer weakness, but the unceremonious revision of historical data, which as the chart below mysteriously whacked away a whopping $40 billion in real (i.e., inflation adjusted) disposable income. Because as the chart below shows, somehow, somewhere starting in March and continuing through the last month just before the election (the September data was released on October 29 or a week before Obama's reelection), $40 billion in cumulative disposable income evaporated. Where it went, and/or why it had been counted in the first place is anyone's guess. But one thing is certain: 0.25% of annualized GDP was just whacked away. One wonders: how many more such retroactive revisions will we see before reality and economic propaganda myth are finally superimposed?