“We have to turn the page on the bubble-and-bust mentality that created this mess,” President Obama stated authoritatively in his weekend radio address... but do not get too excited by the possibility of a real end to the Keynesian experiment and a return to 'free' markets for the President, in his oh-so-not-trying-to-start-a-class-warfare-battle way, blames bubbles not on Central banks (who have done "an outstanding job") but on the skewed distribution of income. As Bloomberg reports, Obama states “When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy." The problem with his way of thinking is best described by the status quo defender Sarah Bloom Raskin who offered up this insight into what the manipulation of market interest rates gives us, "asset bubbles are a feature of our financial landscape." So there it is, a feature (not a bug) that the President wants to get rid of (and yet wants to maintain the illusion that unrealized profit (and debt) is wealth).
Guess what comes next in the numbered sequence: 30.0%, 60.0%, 66.666%? If you said 71.4%, or 2/5, which just happens to be Larry Summers' latest Fed Chairmanship odds according to Paddy Power, you are correct. Janet Yellen, who was once a 1/3 favorite has now plunged to just 7/4 or about 30% odds. And while Bill Gross' tweet certainly moved the market, perhaps a far greater concern to longs everywhere (of both bonds and stocks) is the realization that with every passing day Larry Summers gets closer to becoming the next Fed chairman.
“For my own part I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.” - Janet Yellen, 2010
The amusing news overnight was that following slightly better than expected Q2 GDP data out of Germany (0.7% vs 0.6% expected and up from 0.0%) and France (0.5% vs 0.2% expected and up from -0.2%), driven by consumer spending and industrial output, although investment dropped again, which meant that the Eurozone which posted a 0.3% growth in the quarter has "emerged" from its double dip recession. The most amusing thing is that on an annualized basis both Germany and France grew faster than the US in Q2. And they didn't even need to add iTunes song sales and underfunded liabilities to their GDP calculation - truly a miracle! Or perhaps to grow faster the US just needs higher taxes after all? Of course, with the all important loan creation to the private sector still at a record low, and with the ECB not injecting unsterilized credit, the European depression continues and this is merely an exercise in optics and an attempt to boost consumer confidence.
'Larry Summers for Fed Chair' proponents are working hard to reverse his generally poor reputation and seem to have gained some ground. They’ve tempted even Fed skeptics with reports that Summers doesn’t believe much in quantitative easing. But his supporters are also making claims that don’t stand up to the facts. Call us old-fashioned, but we think we should be wary of power-hungry egotists whose personal philosophy is to obscure the truth.
In a somewhat stunning revelation from the masters-of-money-printing, the SF Fed (whose former head is none other than alleged Fed chairwoman frontrunner Janet Yellen) has found that "asset purchase programs like QE appear to have, at best, moderate effects on economic growth and inflation." One has to wonder why this sudden change of heart? Perhaps to pave the way for the less-than-enamored-with-QE Larry Summers' arrival... as we noted previously his views that “QE is less efficacious for the real economy than most people suppose." Or maybe this is a way for Ms. Yellen, to ingratiate herself with the president by indirecly toning down expectations she would go "feral hog" on the CTRL-P button? In any case, markets appear a little concerned at this rising Fed canon of removing the liquidity spigot despiet the all-time-highs in stocks.
Outside the fetid terrarium where US economists live, like skinks kept as pets by bankers, other forces are in motion. For instance, there’s the non-theoretical, non-financial economy, which is now apparently based on the trade in tattoos, and the journey by automobile from the nearly foreclosed home to the tattoo studio, and to the hamburgers, pizzas, and fried chicken thighs consumed on each end of the journey. It seems, based on the latest odds, that Larry Summers will be entering the scene the way Vincent Price used to enter a Hammer Studio horror film - reliably delivering some deadly unpleasantness. We don’t think a more perfect figure might be found for piloting the garbage barge of American finance over a Niagara Falls of consequence.
While Janet Yellen's chances of becoming the next head of the Fed are plunging, those of Larry Summers are soaring, and it may be all due to a simple Freudian slip by the president. For those who missed, below is the full transcript of Obama's Friday's Q&A on the topic of who will succeed Ben Bernanke. Perhaps the most notable component: the president's pre-slipped reference to Janet Yellen's gender. Because if "he" occupies so little of Obama's attention, then what really are "his" chances of becoming the most important woman in the history of the world? To wit: "I have a range of outstanding candidates. You've mentioned two of them — Mr. Summers and Mr. Yellen — Ms. Yellen. And they're both terrific people."
Do you see what happens Larry when you float a strategic trial balloon or two? Your odds literally surge, at least according to Irish bookmaker Paddy Power, which in the absence of InTrade has become the only market polling venue where pundits put money where their mouth is (as opposed to countless clueless Op-Eds written by every self-proclaimed Fed expert in existence). Where two weeks ago, on July 24, Larry "the hawk" Summers was a long 20% odds challenger to Janet Yellen, who was a solid 75% favorite to become the next Fed chair, since then Yellen's odds have crumbled to just 33% currently, while Summers has exploded higher and after peaking at 60% two days ago has climbed even higher, and is a 66.6% (appropriately enough) favorite currently. Time for the perma-Doves to panic yet?
Following yesterday's soundbite-generating speech, President Obama will continue his 'victory lap' over housing. In a social-media event (#AskObamaHousing), Obama will join the CEO of Zillow to answer all your housing questions. From "which market do I buy/invest in to make the most money in the next 3 months flipping dat house?" to "how will my new rent-backed-securities hold their value if you cap rates?", and from "Isn't Eminent Domain just another wealth transfer plan from a large diversified group of investors to a small of group of people?" to "have you got naked pictures of Larry Summers to ensure that he instantly un-Tapers upon appointment and smashes rates back down?", we cant wait to hear the public's questions... especially as homeownership plunges to 18 year lows and rent costs surge, the 'recovery' is stalling as hedgies flee, and affordability retreats dramatically. With Zillow's dismal earnings it seems they need Obama as much as he needs housing hope...
However, the Fed is terrified of losing control of the system, so it wants to continue doing anything no matter how futile in order to maintain the appearance of confidence. God forbid anyone figures out the emperor has no clothes…
Two weeks ago, Larry Summers was a long-shot 4/1 odds of becoming the next Fed Chair while Janet Yellen (at 1/3) was a 75% probable shoe-in. What a difference an onslaught of PR makes... According to PaddyPower's now re-started odds for the next chair(wo)man, the 'smart' money has piled into Larry Summers shifting his odds to a remarkable 7/4 (or triple the probability of 2 weeks ago at 60%). Yellen has dropped to a 36% probability (halving her likelihood) and Roger Ferguson has dropped off the front-runners sheet. Is the market jittery as the 'conscientious objecter to QE' rises in certainty.
Just a few days ago on July 27th President Barack Obama said that the next Fed head had to consider average Americans when setting monetary policy. If only that were true.
Confused by all the trial balloons, meandering daily Op-Eds (most of which written by novice journalists with even more bizarre agendas), and "paddy power" market updates? Then here is Scotiabank's Guy Hasselman with his latest rundown on just where we stand in the race for the next Fed chairman.
While assuring the world that he will not give advantage to Larry Summers, we wonder if the meeting with the President will sound a little like this?