Market Talk

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.

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“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…

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.

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.

Some Bernanke/unemployment-type links for your reading pleasure this morning:

- Real Time Economics is live-blogging Bernanke’s testimony.

- WSJ’s Joe Light, with whom we wrote Monday’s Upshot column, has a post at Real Time Economics, “Why Aren’t Employers Hiring?” The post won’t come as a surprise to readers of this blog, but the comments are very enlightening, and I recommend you read through them.

- And if you want to see the Ron Paul’s kill-the-Fed-fest, the committee’s got a link to a webcast on its website.

Here’s an interesting tidbit (subscription required) from the hearing, from Newswires’ Michael Derby:

Bernanke appears to suggest QE2 will meet its $600 billion target and go no further. Bernanke’s said QE2 can likely be brought to an end if the recovery is moving forward and inflation remains low and stable, and said an unwind would likely begin if growth surged and inflation jumped.

The QE2/QE3 debate is going to be heating up over the next few months, but the even bigger issue, hardly being discussed at all, is the fed funds rate. It’s still at zero, and so long as it is at zero, official Fed policy is just blowing bubbles. Don’t forget, Alan Greenspan blew the biggest bubble in our lifetimes by pushing rates down to 1%. Helicopter Ben’s gone 1% further than 1%.

Helicopter Ben vs. Don Texote. Sounds like a damn monster movie.

Today’s news highlight, the Movie of the Week, if you will, is the testimony of Fed Chairman Ben Bernanke, who’s speaking in front of the House Budget Committee. These little hearings with sitting Fed chairmen are always entertaining, if for no other reason than you get to watch a lot of dim-bulb politicians trying to score political points because they know the cameras are on. But there are some issues that are, ah, inflating, shall we say, that might make this one more interesting than usual.

Now, the Fed chairman himself is going to stick to the script as much as possible. Here’s a little preview we put out on the Wire this morning, written by Stephen Bernard:

1332 GMT [Dow Jones] Fed chairman Ben Bernanke is not likely to stray from his long-held position that the economy is still weak enough for the Fed to continue its $600 billion bond-buying program, Brown Brothers Harriman wrote in a research note. “We expect Bernanke’s remarks to resemble the speech he gave last week, highlighting that despite gradual improvement in the economy, the Fed remains uncomfortable with low inflation and high unemployment,” the note said. The euro is at $1.3653 in morning trading in New York ahead of the speech, from $1.3625 late Tuesday, according to EBS via CQG.

But today’s could especially interesting. For one thing, the committee’s composition has changed since the midterm elections, so you could see some new dim-bulb politicians looking to score new political points. Second, well, did you see the front page of the Wall Street Journal? “Inflation Worries Spread,” top of page one.

Remember last week I was fantasizing about what one question you would ask the Fed chairman if you could? Well, I’ve got another one, a better one. It’s this, and I have to admit I didn’t come up with it. Randall Forsyth at Barron’s and Joan McCullough at East Shore Partners both made the same point:

How can the Fed take credit for boosting stock prices, but not be responsible for rising commodities prices?

You’d probably have continue with a whole slew of slyly phrased follow-up questions to get a real answer, you know, like Lt. Kaffee in “A Few Good Men.” Can’t you just see it? Whatdya you want? I want the truth!

If we could ever get Ron Paul to play the part of Lt. Kaffee, and Bernanke to play Col. Jessep, we could really have something.

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Okay, I think I’ve got my question for the Fed chairman. But before I tell you what it is, read this snippet from Newswires’ Michael Derby, who’s covering Bernanke’s speech at the National Press Club:

MARKET TALK: Bernanke Lays Out QE2′s Successes

12:40 (Dow Jones) Here are the reasons why Bernanke thinks QE2 is working: “Equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation as measured in the market for inflation-indexed securities has risen from low to more normal levels.” As for the rise in bond yields, the chairman says that’s what you would expect in light of a monetary policy accommodation.

Okay, got it? So here’s my question:

Are you kidding me?

The first thing, the first thing the Fed chairman trots out as a justification for creating $600 billion out of thin air and pumping it into the economy, is that it’s driving up stock prices? Seriously? That’s part of the Fed’s mandate now?

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Fed chairman Ben Bernanke is delivering a speech at the National Press Club in a few minutes (12:30 p.m. eastern time) after which, he will take questions from the press, a rare move.

I’m sure we have one of our reporters covering it, and while nobody asked me my opinion, I wonder, if you had one question you could ask the Fed chair…anything…what would it be?

Oh, boy, it would have to be a good one. I mean, you can’t just come at the guy and say, why are you driving up food prices and causing riots across the world? Or, why are you debasing the dollar? This guy’s an all-star goaltender, maybe not Martin Brodeur territory, but he’s good. He’d slap that thing away in a second. No, if you’re gonna get one past the five hole on Helicopter Ben, it’s gotta be a sneaky, around-the-back-of-the-net shot, one he doesn’t see coming.

With that, the floor’s open: you’ve got one question for the Fed chairman. What is it?

I’m trying to come up with one, too. If and when I get a winner, I’ll share it with you.

With the Dow crossing 12000 and the S&P 500 poised at 1300, and commodities across the globe on a tear, we leave it to Gluskin Sheff’s David Rosenberg to put things in perspective. We pick this up from Rosenberg’s daily commentary, right after he noted that some retailers are sounding a bit panicky.

We’ll tell you someone who isn’t panicky at all. His name is Ben Bernanke. He runs the nation’s printing press, and he is one cool customer. His nickname is Helicopter Ben. We’ll call him HB for short.

We just saw in the King Report that HB gave an interview on CNBC last Thursday when he was queried about the success of QE2, especially since bond yields and mortgage rates have gone up substantially in recent months. Here was his response:

“Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20%-plus and the Russell 2000, which is about small cap stocks, is up 30%-plus.”

Well, there you have it. When you have a central bank chief talking about the virtues of small-cap stocks, you know you really have a pro looking after the country’s monetary affairs. One has to wonder whether Cramer will end up on the short list for HB’s replacement when the time comes. So what we have is a Fed that is now targeting the stock market and engaging in some form of manipulation to invite the same speculative risky behaviour that has ended so badly in the past. But make no mistake, HB is spiking the Kool-Aid in a significant way and it is working for now. So the Bernanke put is really an extension of the old Greenspan put, but with just a different strike price.

Jim Cramer for Fed chair. That’s the quote of the day, right there. Boo-yah!