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…

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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- Mark Hulbert says some are drawing the wrong lessons from this week’s market anniversaries.

- The view from the bottom. Our MarketBeat bud Matt Phillips compiles some quotes from market watchers when stocks were bottoming out this time last year.

- “As we celebrate the one year birthday of the current bull market, a key characteristic that still looms one year in is the lack of conviction and confidence in the economic outlook for those on Main Street versus the more optimistic view of those who work on Wall Street,” Peter Boockvar writes.

- Wards of the state enjoy a nice day. Citi (C), AIG, Fannie Mae (FNM) and Freddie Mac (FRE) all rally.

- Small business owners now say conditions will be worse six months from now. “It’s not a pretty picture,” Economist’s Free Exchange blog says. “The problem is clearly not labor supply. Rather, the economy’s principal job creators are seeing too little demand to justify increases in hiring. That’s the drag on recovery.”

- Cisco (CSCO) says faster router “will forever change the Internet? Does the announcement live up to hype? Shares close flat at $26.13.

- Government has bailed out the banks, now it’s time to bail out our nation’s schools, former labor secretary Robert Reich says.

- An improved Web browser on Amazon’s (AMZN) Kindle is long overdue, MediaMemo blogger Peter Kafka notes. “At this point having a wireless device that only grudgingly accesses the Web makes no sense. And it certainly won’t fly once Apple’s (AAPL) iPad ships next month.”

- “The biggest banks in some European countries today are already too big to save,” former IMF chief economist Simon Johnson says. “Unless we take immediate and real action to reduce the power – and size – of our largest banks, we are heading in exactly the same direction.”

- Monetary policy and unemployment: Should the Fed have done more? Mark Thoma ponders.

Bernanke's doing a lotta talking, but when will he take action?

Hot off the presses: Fed chairman Ben Bernanke says the central bank will raise rates when the economy recovers.

Revelation? Not quite. Across The Curve blogger John Jansen said it best: “I wonder who would have been so obtuse as to think otherwise?”

Key issue, of course, is timing – when will the Fed decide a rate-hike is warranted? We’re not any closer to figuring that out (and probably neither is the Fed.)

For now, however, the mere mention of increasing rates at some distant point is enough to give the US dollar a much needed boost.

Still, don’t expect the Fed to boost rates until after unemployment peaks, despite recent Fedspeak from Bernanke and other policy makers, Calculated Risk predicts. In the early 1990s, the Fed waited more than a year and a half after the jobless rate peaked before raising rates. And after unemployment peaked in 2003, the Fed waited a year to boost rates.

Unemployment’s expected to keep rising into 2010, which has Calculated Risk believing the Fed won’t raise rates until late 2010 at the earliest, and more likely sometime in 2011. Waiting for the economy to “improve sufficiently,” as Bernanke puts it, likely means the Fed will wait for a meaningful decline in unemployment, blog adds.

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We're from the government, we're here to help.

We’ve been noticing a dynamic in the consumer and producer prices reports lately, where the month-to-month changes are positive, but the year-to-year changes are negative, in some cases wildly so.

It happened again this morning. Consumer prices rose 0.7% in June from a month ago. But they were down 1.4% from a year ago, the biggest decline since 1950, back when the buck stopped at Harry Truman’s desk.

The discrepency is mainly due to crude prices, which have whipsawed between $145 last summer and $33 earlier this year. But a larger culprit is monetary policy itself, as the Federal Reserve lurches from flooding the plains, to draining the pool sharply, to flooding the plains again.

That makes it harder for people to properly allocate their money, to know what”ll it cost to heat their homes in the winter or drive their cars in the summer. It makes it harder for investors to properly value assets, because it creates volatility that wracks the idea of efficient markets.

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Let's see you get out of this one, Bernanke.

Okay, that headline’s not really true. Well, it’s true but it’s misleading. A reader suggested we “punch up” our headlines, so we thought, hey, what’s scarier that deflation? Outside of John Meyer being the voice of a generation, nothing.

Read literally, the headline is true. Deflation will, given the chance, wreck the world economy. But it’s misleading; it conveys the sense that deflation is already destroying the economy. That is not true.

But it doesn’t mean deflation isn’t lurking around, and that investors, consumers, corporate executives and government officials shouldn’t be prepared to wrestle with it.

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