Market Talk

The news headlines certainly aren’t bullish today, but gloomy news seems to be little match for the bountiful liquidity traversing the globe.

I said it almost exactly one year ago: a better tag for Alan Greenspan would be the “Sorcerer’s Apprentice.” When your policies lead to as much havoc as his did, nobody but nobody should be calling you a maestro.

But the former Fed chairman soldiers on, putting out a paper that lays the blame on the “weak recovery” at the feet of an overreaching government, which sends Paul Krugman into orbit:

Greenspan writes in characteristic form: other people may have their models, but he’s the wise oracle who knows the deep mysteries of human behavior, who can discern patterns based on his ineffable knowledge of economic psychology and history.

Sorry, but he doesn’t get to do that any more. 2011 is not 2006. Greenspan is an ex-Maestro; his reputation is pushing up the daisies, it’s gone to meet its maker, it’s joined the choir invisible.

He’s no longer the Man Who Knows; he’s the man who presided over an economy careening to the worst economic crisis since the Great Depression.

You’ve got to appreciate Krugman consciously parroting (pun intended) an old Monty Python bit, the famous dead-parrot sketch.

“This is an ex-parrot.”

(h/t Big Picture)

Sitting out the past week on vacation, one thing I was struck by is the vibe from Wall Street analysts, strategists, pundits, etc., that the stock-market pullback driven by the Japan disaster is just another buying opportunity. Just another chance to load up.

The sense of assurance in the voices of guests on CNBC, or in written missives, reminds me of the same widespread attitude in the months following the tech bubble bursting in early 2000. Every dip was to be bought, stocks were “on sale” and each sell-off just created another “buying opportunity.”

I admit to eventually buying into the logic myself, by picking up 50 shares of Cisco (CSCO) in an IRA in early 2001 after the stock had fallen more than 50% from its 2000 peak. How much further could a blue-chip tech darling like CSCO fall, anyway? Another 60% from where I bought it, that’s how far. Ten years later it still hasn’t recovered all the way.

Looking back, the bursting of the tech bubble seems like a brief rain shower compared to the mayhem in the global picture today. As Paul noted earlier, how can anyone say with reasonable accuracy that “the worst is over”? Simply absurd.

Another grabber while I was away was the Fed noting “that the economic recovery is on a firmer footing.” Maybe so. But how firm can it be if the committee, without a single dissenter, caps off the statement by saying it “continues to anticipate that economic conditions…are likely to warrant exceptionally low levels for the federal funds rate for an extended period”?

If things are firming so nicely, then why not cease with the QE2 and ease up interest rates a quarter or even half a point? Don’t hold your breath for that, citizens. The only thing on firm footing is Ben Bernanke’s loafer, pressing the liquidity pedal to the floor.

I don’t know if I have or even need to comment on this story about the Fed and “core” inflation in today’s Wall Street Journal, but I have to at least point to it. It amplifies a point we made last week as well.

From the Journal:

As gasoline prices surge, Federal Reserve Chairman Ben Bernanke is changing his tune when discussing inflation in public—in part to avert criticism that central bankers are out of touch with consumers.

Fed officials have for years cited “core inflation,” a measure that excludes food and energy prices. That is because core inflation tends to be a useful predictor of inflation over a couple of years, which they call the medium term, a period that is key to monetary-policy decisions. But this focus has drawn criticism that Fed officials aren’t facing economic reality, as if they don’t eat or drive.

Now, Mr. Bernanke is taking another tack in his public communications. In two days of testimony on Capitol Hill earlier this month, the Fed chairman never uttered the words “core inflation” while explaining the central bank’s aims and policies. Instead of citing a specific measure, he emphasized the Fed’s time frame.

This follows up William Dudley’s iPad line in Queens, N.Y., last week, when he tried to explain away inflation by point to iPad prices. The crowd wasn’t buying it. People don’t think the Fed has any real clue about actual, real-world inflation. The Fed feels this stinging criticism, so it addresses that criticism by…altering its language.

Unless the Fed’s utilization of time frames can bring down gas and food prices — and who knows, maybe it can — this linguistic tack isn’t going to change many people’s minds.

You can’t eat an iPad, no matter how long you own it.

It’s no secret that banks are parked over a mother lode of bad loans, mainly residential and commercial mortgages, and they prefer to not publicly acknowledge (by marking to market) what those loans are really worth. That tactic has helped banks recuperate and appear healthy, but it’s a stance that’s also costing at least of few jobs, in a roundabout way.

We’re a little late to this story, but our new-found fascination with state WARN notices led us to find one from a California company called Kondaur Capital, which said about a month ago that it plans to lay off 161 workers by April 18. A little searching brought up an article last month by the accomplished Paul Muolo at National Mortgage News.

Seems Kondaur buys nonperforming loans, and finds itself needing to layoff workers because there aren’t enough bad loans available to buy.

Come again? Aren’t banks still sitting on mountains of toxic debt? Can’t find enough to buy? Continue reading…

Bernanke and company’s continued insistence this week that the Fed’s uber-accommodative policy hasn’t played a role in driving up commodity prices continues to grate, and undermine the central banker’s credibility.

We’ve highlighted the extensive (and comprehensive) list of commodities with rising prices in ISM’s manufacturing survey, with few commodities reported as being in short supply. And no commodities — zilch — falling in price.

Well, no surprise, ISM’s February non-manufacturing survey out today shows essentially the same thing. Count 41 separate items listed as commodities up in price, while only three — cotton, cotton products and electrical components — are considered in short supply. Two commodities were down in price –  computer supplies and janitorial services.

Perhaps there are some nuances to supply and demand, and their effect on commodity prices that Dr. Bernanke has uncovered to explain all this. I’m certainly not an expert, but I can read a chart, and just about every commodity I look at began rising right after the Fed chairman’s Jackson Hole QE2 warm-up speech in late August.

To illustrate this even better, let’s go back to ISM’s reports, pre-Jackson Hole. Take a glance at the August manufacturing survey. Just three — three commodities – up in price (caustic soda, copper and corrugated containers); three down in price (polyethylene, polypropylene and steel) and only one — capacitors — listed in short supply. Continue reading…

As with many others, I’m keenly interested in what happens when the Fed’s QE2 program ends. Will there be a QE3? Will the markets crash without the Fed in there proffering support? Will anyone even notice what the Fed does if Charlie Sheen keeps talking?

One thing I’m wondering is this, and I don’t have a good answer for it although I’m asking around: let’s say the Fed decides not to do another round of asset purchases. It’s still sitting on more than $2 trillion of securities. Let’s say the Fed decides to hold them to maturity, something that been talked about. If that’s the case, sans a bond-selling program that would effectively drain some of the liquidity it put out there, the Fed can sit on its zero-percent interest rates and bloated balance sheet and still have interest rates that are negative on an inflation adjusted basis.

In other words, they don’t need to do a QE3 to still be very loose with their policies. There are issues of timing and reinvesting maturing debt on the balance sheet, but in general I think the Fed can keep monetary policy wide open without undertaking another big program.

It seems reasonable to me to see it that way, but I don’t have a PhD in economics. Actually, I don’t have a PhD in anything, but that’s another story. Gluskin Sheff’s David Rosenberg has contemplated a world without QE3, and comes to the conclusion that it’ll look a lot like the world without QE2, an era that lasted from approximately April to August 2010.

WHAT HAPPENS IF THERE IS NO QE3?

We are now being asked this constantly and the follow-up is “who picks up the slack if the Fed stops its bond-buying program”?

The answer(s) is hardly complicated since we have a template for this in 2010. It is a very simple guidepost.

Last year, from April 23rd through to August 27th, the Fed allowed its balance sheet to shrink from $1.207 trillion to $1.057 trillion for a 12% contraction as QE1 drew to a close. Go back a year to the Federal Open Market Committee minutes and you will see a Federal Reserve consumed with forecasts of sustainable growth and exit strategy plans. A sizeable equity correction coupled with double-dip fears were nowhere to be found.

Now over that interval …

Continue reading…

John pointed out yesterday how Ben Bernanke is actually insulting our intelligence with his arguments. If you want to really understand just how dumb the Fed chairman thinks you are, contrast what he’s saying with the following headlines, about a speech given today by Thomas Hoenig, president of the Kansas City Fed:

DJ Hoenig: Fed Needs To Move Away From Crisis Type Monetary Policy

DJ Hoenig: Mkts Would Benefit From Higher Fed Funds Rate

DJ Hoenig: 1% Fed Funds Rate Still Easy Policy

DJ Hoenig: Too-Big-To-Fail Banks Socialist, Not Capitalist

DJ Hoenig: Supports Return Of Modified Glass-Steagall Laws

DJ Hoenig: Fed Is Monetizing Debt Right Now

DJ Hoenig: Current Fed Policy Playing Role In Rising Commodity Prices

You can read the story for yourself here. Hoenig is one of the central bank’s well-known contrarians, and you expect him to say things like this. But still, how big of a contrast is that to what we’re hearing out of Bernanke this week? And who do you think is closer to the truth?

Bernanke has been adamant that the Fed is not monetizing debt, or driving up commodity prices. Think he’d even acknowledge that a 1% fed funds rate is still “easy” monetary policy?

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…