Market Talk

Bruce Krasting caught the biggest tidbit to come out of Ben Bernanke’s rather boring testimony today (which I first saw on Zero Hedge) , does the grim math, and comes up with a conclusion that shows just how worthless, literally worth less, the Fed is making the dollar.

Alabama’s Richard Shelby asked the Fed chairman how he decided that $600 billion was the right amount for QE2. You can watch the C-Span video for yourself; the exchange comes around the 32-minute mark.

The Fed chairman explained that the central bank’s rule of thumb has been that roughly $150-$200 billion in bond buying has the same effect on the economy as a 25 basis point rate cut in the fed funds rate. So, by going out and buying $600 billion worth of Treasurys, the Fed is essentially cutting interest rates by 75 basis points. I say essentially, of course, because with the actual fed funds rate at zero (a band between zero and 25 basis points, to be precise,) it can’t cut interest rates any further. So it buys bonds.

Krasting takes the rule of thumb to its logical conclusion:

The sum of QE 1, QE lite (the top off of QE1) and QE2 is $2.35 trillion. Using Bernanke’s formula you get a range of 4% to 5% as the approximate interest rate consequence of QE. (2.35/.15 or 2.35/.2)

That is an extraordinary number. The Fed’ ZIRP policy set interest rates at zero. QE has brought that to -4.5% (average) based on Ben’s numbers.

I don’t think that this has ever happened before in the USA. The examples I can think of in history outside of the US all ended badly. Ben has set monetary policy so that interest rates are 5-6 % below inflation. There can be only one possible result. Inflation of everything we use is going to explode. Food, clothes, energy, transportation, ball bearing, plastics, you name it. The only thing that is not going to get inflated is wages and residential real estate. Cheap money will not fix structural problems.

Continue reading…

“Only don’t tell me you’re innocent. Because it insults my intelligence — and makes me very angry…”
-Michael Corleone, The Godfather

Listening to Ben Bernanke repeatedly deny that the Fed’s QE2 program has played any role in jamming up commodities prices stirs the same emotions Michael felt when his brother-in-law Carlo denied fingering Sonny for Barzini’s people.

Bernanke continues to insist that rising commodity prices are due to supply and demand dynamics, and denies any culpability of the Fed’s easy money monetary policy. Senators at today’s testimony on the Hill let that assertion go unchallenged. Would’ve been nice if someone asked Bernanke to reconcile ISM’s February manufacturing survey today, listing roughly 30 commodities up in price, none down, but only three commodities — capacitors, cocoa powder and electric components — in short supply.

It’s a simple enough question: Dr. Bernanke, there’s a laundry list of commodities up in price, and many of their run-ups began in late August, coincident with early mentions of potential QE2. Less than a handful of commodities were reported by manufacturers as being in short supply. So how can supply and demand dynamics alone explain the sharp run-up in commodities during the past six months, when there appear to be few, if any, supply constraints?

For an organization like the Fed where credibility is crucial, it’s amazing that its officials continue to stand by such a flimsy rationale for high commodity prices. Continue reading…

Is there anything these guys don’t profit off of?

From Newswires’ Brett Philbin:

Financial exchanges and investment banks are well positioned to benefit from energy/commodities volatility related to turmoil in the Middle East, Credit Suisse says. While commodities typically account for 8%-13% of revenue at Goldman Sachs (GS) and Morgan Stanley (MS), firm says year-to-date trends support its expectations for a strong sequential quarter rebound in fixed income sales and trading, helping to offset more muted investment banking activity. Says commodities could be a focus of 1Q EPS reports for GS and MS; adds IntercontinentalExchange (ICE) has 70%-75% of its revenue tied to commodities, while for CME Group (CME) it’s 30%-35%.

Amazing, isn’t it? Commodity prices spike, causing an upheaval around the globe, and it’s just one more source of profits for Wall Street. You know what else? When prices drop on the other side, these guys’ll make money off that, too. It takes some outrageous cataclysm to knock these guys off their stride, and when that happens they just call in some favors down in Washington, and down comes the bailouts.

Actually, there is one thing that is like kryptonite to financial markets: a central bank that’s tightening monetary policy. While Ben Bernanke certainly didn’t say he’s going to tighten policy in today’s Congressional testimony, he didn’t say the Fed would be looking to expand its QE program, and that was enough to spook the markets.

The Dow’s been off as much as 97 points (although, of course, somebody’s got to process those trades, right?) Don’t forget that even beyond any direct QE support, the Fed still has interest rates at a recklessly accomodative zero. The Greenspan Fed was able to tip the global economy into a near-death spiral with only a 1% rate. The Bernanke Fed may finish the job yet.

The rally that began midday on Thursday is getting nail here this morning, with the market selling off after Fed Chairman Ben Bernanke didn’t drop any hints about the Fed extending the QE program in his Congressional testimony.

(Swear to God, we heard one of the Congressmen refer to “the Goldman.”)

Let’s not forget that even after QE2 ends, the Fed still has interest rates pinned to the floor with the spilled beer and peanut shells, and it took only a 1% fed funds rate to spark the housing bubble that in turn sparked the housing bust that in turn sparked the financial crisis that in turn sparked…well, you get the point.

The other big thing today is oil. Keep an eye on it.

There’s been an awful lot of news escaping the North Africa and the Middle East today, and it’s all pushing crude prices higher. There have been a raft of rumor, vehemently denied, that Saudi tanks were moving into Bahrain. That tanked Saudi stocks.

Libya remains in a state of civil war, there are reports that Iranian police fired teargas on protesters, Oman is deploying troops amid its strife and Yemen’s separatists are already looking at a future past the monarchy. Clearly, this is driving up oil prices. Lately, the Nymex benchmark is up 1.6% at $98.49, and the Brent benchmark is up 1.7% at $113.66.

As we wrote yesterday, keep your eye on the $103-$104/barrel level of Nymex crude – a move over that could have serious repercussions – and remember that the revolt spreading across the Africa and Arabia isn’t going to be tied up in a neat little bow like some half-hour sitcom at the top of the hour, and it’s likely to go off in directions that absolutely nobody is expecting.

Nobody is seriously talking about $4 gas, or $5 gas, but it is a real possibility. Which means that if it comes, nobody will be ready for it. GM’s chairman this morning said the industry isn’t ready for $5 gas. The national average for regular unleaded is $3.37, according to AAA. We know the spike from last week will be working its way to the pump over the next couple weeks, so expect prices will keep rising. If the popular revolt keep spreading, if crude prices climb over that $103 range, and the oil market – about as festering a pit of hot money and speculation as there is – drives it ever higher, you will see $4 gas here in the States.

“I don’t think the industry learned a lot of lessons from 2008—they will this time around,” Daniel Akerson said at the Geneva motor show. “It would not be a good thing to see $5-a-gallon gas right now.”

You know what? It wasn’t just the auto industry that didn’t learn the lessons of 2008. But they may yet get the chance to take a make-up test.

Our colleague Michael Derby has this overview of Fed Chairman Ben Bernanke’s testimony up on Capitol Hill this morning:

In testimony before Congress, Fed Chief Ben Bernanke says he sees a continued US recovery and expects inflation to stay contained. But he also warns sustained commodity-price increases could threaten the recovery and warns the central bank won’t allow inflation to take hold. Most of Bernanke’s comments on the outlook hew closes to things he and other Fed officials have said. Put another way, the remarks are no game changer, although they do reflect the increased attention paid to commodity prices.

The two most interesting topics today and tomorrow are likely to be the end of QE2, and commodity prices. On the former, you may get a hint or two, but that’ll be it. On the latter, the Fed chairman is still holding to his opinion that Fed policies are not the cause of the inflationary wave that’s spreading across the globe.

I just don’t know where to go with that. The Fed’s been trying like madmen for the past two years to spark inflation, given they’re terrified of deflation. The dollar is the world’s reserve currency. Most markets trade in dollars. Bernanke can do the “Huh? Wha? Don’t look at me” bit, but it’s not a very convincing act.

For more than a year, US stocks have had a propensity for solid gains on the first day of the month. Modestly higher premarket futures suggest bulls intend to keep that pattern intact, but it may be more of a chore today, as oil rises again amid ongoing Mideast/North African strife.

Bernanke goes to the Hill this morning to speak with senators about the economy, an event that typically makes for some interesting theater but otherwise light on insight.

February ISM manufacturing index and January construction spending both due at 10:00 a.m ET. February auto sales also due today.

Futures were looking sharper two hours ago. S&P futures up 3.50, Dow futures up 27. Ten-year note down, yield at 3.45%. Crude futures up 1% at $97.93.