Tag Archives: federal reserve

How Fed’s ZIRP is Fueling the Next Subprime Bust

Guest Post from StealthFlation (David Stockman)

Deformations On The Dealer Lots: How The Fed’s ZIRP Is Fueling The Next Subprime Bust

On any given day, Janet Yellen is busy squinting at 19 essentially meaningless labor market graphs on her “dashboard”, apparently looking for evidence that ZIRP is working. Well, after 71 months of zero money market rates—-an unprecedented financial absurdity—-there are plenty of footprints dotting the financial landscape.

But they have nothing to do with sustainable jobs. Instead, ZIRP has fueled myriad financial bubbles and speculations owing to the desperate scramble for “yield” that it has elicited among traders and money managers. Indeed, the financial system is literally booby-trapped with accidents waiting to happen owing to the vast mispricings and bloated valuations that have been generated by the Fed’s free money.

Nowhere is this more evident than in the subprime auto loan sector. That’s where Wall Street speculators have organized fly-by-night lenders who make predatory 20% interest rate loans at 115% of the vehicle’s value to consumers who are essentially one paycheck away from default.

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Around the Web

  • Ukraine/Russia back in the news from Bloomberg.  As usual, market players tune this out and gold players, that goes double for you.  There is still a tout or two out there willing to play to the cheap seats.
  • Zero Hedge seems to think GOFO still matters.  I think GOFO didn’t matter when I first heard the term years ago and I don’t think it matters now.  But that’s just me, an anonymous internet news compiler robot.

 

Good Riddance to QE…

Guest Post by David Stockman via Stealthflation

Good Riddance To QE—-It Was Just Plain Financial Fraud

QE has finally come to an end, but public comprehension of the immense fraud it embodied has not even started. In round terms, this official counterfeiting spree amounted to $3.5 trillion— reflecting the difference between the Fed’s approximate $900 billion balance sheet when its “extraordinary policies” incepted at the time of the Lehman crisis and its $4.4 trillion of footings today. That’s a lot of something for nothing. It’s a grotesque amount of fraud.

The scam embedded in this monumental balance sheet expansion involved nothing so arcane as the circuitous manner by which new central bank reserves supplied to the banking system impact the private credit creation process. As is now evident, new credits issued by the Fed can result in the expansion of private credit to the extent that the money multiplier is operating or simply generate excess reserves which cycle back to the New York Fed if, as in the present instance, it is not.

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The Meek Shall Inherit the Earth

Guest Post by Tim Knight

These videos are not “news”, but they are quite interesting.

The first one, from early in 2009, shows Congressman Alan Grayson grilling Donald Kohn (of the Federal Reserve, in case it wasn’t screamingly obvious already) about where the $1.2 trillion of taxpayer money was sent (we all know the answer – Goldman Sachs – but it’s fun watching Kohn-head squirm anyway).

The more interesting video is below, in which the same Congressman Grayson queries the most evil-of-evil attorneys Scott Alvarez about whether the Fed manipulates the stock and futures markets (ha! ha ha!). I’m shocked to listen to Alvarez’s voice; I thought he would be a gritty, gruff, rough-and-tumble, go-to-hell kind of personality.

Instead, he sounds like an insecure hairdresser whose employment at a Castro Street styling salon is in question. Do all members of the Fed have these quivering voices, such as, famously, Ben Bernanke’s? In their tiny, blackened souls, do they know deep down they are evil liars, and what’s left of their conscience is tugging at their vocal cords? I’d say the answer is an irrefutable “yes.”

“It’s Inflation All the Way, Baby!”

The title’s quote is one of many eminently quotable messages I had the pleasure of receiving over a few years of contact with a late, great and a very interesting man* named Jonathan Auerbach, who headed a unique specialty (emerging and frontier markets) brokerage in NYC called Auerbach Grayson.

kabukiJon was an honest and ethical man.  He was also a gold bug (in that descriptor’s highest form) who innately understood the Kabuki Dance that has been ongoing by monetary authorities since the ‘Age of Inflation onDemand‘ (what guest poster Bruno de Landevoisin calls the Monetized New Millenium) started its most intense and bald faced phase in 2000.

Yesterday the minutes were released from the last (FOMC) meeting of official interest rate manipulators and surprise surprise, they are found to be hand wringing about the strong dollar.  A strong dollar is going to take direct aim at US manufacturing among other exporting businesses, after all.

“Over the intermeeting period, the foreign exchange value of the dollar had appreciated, particularly against the euro, the yen, and the pound sterling. Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector.”

And the money line…

“At the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC’s 2 percent goal.”

In an inflated construct (cue the chart for what seems like the 1000th time), there is no way out other than inflation “all the way”.

sp500

So while we twittle our charts and manage markets in the here and now as if we are conventional market participants, we (well I, anyway) are anything but that.  What I do is have some fun along the way with graphical representations of the falseness that is the underpinning of the Age of Inflation onDemand; and the humor too.  Every time the Fed rolls over on making real and sound policy and/or speaks out of both sides of its mouth the reaction is either comical or sad, depending on how you look at it.  I choose both, it’s comical and sad…

outerlimits

“There is nothing wrong with your television set. Do not attempt to adjust the picture. We are controlling transmission. If we wish to make it louder, we will bring up the volume. If we wish to make it softer, we will tune it to a whisper. We will control the horizontal. We will control the vertical. We can roll the image, make it flutter. We can change the focus to a soft blur or sharpen it to crystal clarity. For the next hour, sit quietly and we will control all that you see and hear. We repeat: there is nothing wrong with your television set. You are about to participate in a great adventure…”

Nothing has changed since 2000, when Alan Greenspan began this most adventurous experiment in inflation.  What we have had are boom and bust cycles.  The current cycle has simply emboldened the worst kind of trend followers and touts in an ‘In Greenspan err, Bernanke, err… Yellen we trust!’ continuum of greed and ignorance.  Today, the worst of us hold sway in promoting fantasies that newer and more gullible arrivals on the financial scene will pay for one day.

The FOMC minutes released yesterday prove that they are trying to inflate, they want inflation and that in this “monetized new millennium” it is asset appreciation above all else; especially above the saving that a chronically strong dollar would promote among the population.  Saving after all, is necessary for real and sustainable economic cycles.

aliceThat is not what we have going here.  What we have here is a one-way ticket to the Outer Limits or Wonderland or (pick a popular culture reference)…

* Among other things, Jon was pals with New York Dolls guitarist Johnny Thunders, attended a Mets game with Iggy Pop, was involved in the 1960’s NYC film and arts scene and even advised President Clinton on economic issues.  “Did he take your advice?” asked I.  “Ha ha ha… no” said Jon.  Like I said… interesting.  He was also NFTRH’s very first subscriber, a fact that to this day keeps me trying to live up to his standards.

The Beginning of the End

…of confidence in these clowns, that is.  Click the MarketWatch graphic and get the details on how our mighty heroes at the Federal Reserve detest and fear the very currency they try to suck the blood out of in favor of asset appreciation err, supposedly steward.  So our thesis stands; namely that a chronically strong currency – against policy makers’ wishes – would ultimately undo the great experiment.

headline

“Concerns about adverse market reaction held off language change.”

Need any more evidence that they are in a box with the monster they’ve created?  Cue the chart…

sp500

[edit]  Picked up from another site…

from Downtown Josh Brown, “…and on Wall Street today, stocks had their best session in a year with the Dow jumping 270 points on news the economy is too fragile…”

Here’s the post at his site… Stocks Explode Higher on Fears of Renewed Economic Weakness

Hilarious… and perfect!

FOMC & ZIRP; What They Do, Not What They Say

The reason we took QE tapering seriously was that it made sense at a certain point of economic recovery for the Fed to start backing out of the market pumping business of printing money to fund T bond and MBS purchases.  With traction gained in the economy, my thought was that now it might be time for rising  interest rates out along the curve to incentivize banks to do the heavy lifting, as ZIRP on the Fed Funds level pinned T Bill yields to the mat.

It was the old ‘borrow free and mark it up for a slam dunk carry trade’ routine.  In short, the people bailed out the banks and now the banks can lend back to the people and make even more money doing it.  Nice racket, with the Fed at your back.

So it seemed there was a valid scenario in play whereby the Fed could make good on the rumors of a coming QE taper and as it turned out, they did just that.  They initiated and are now carrying through to the closing phases of the ‘taper’, with markets and the economy doing just fine after all that doomsday hype in the second half of last year.  To boot, 10 year T bond yields have actually declined by about a 1/2% in 2014 despite the Fed tapering out of the bond buying business.

tnx
10 year yields are down in 2014, but may be sneaking out the downtrend

So in 2013 some Fed members ruminated in the media (they Jawboned) a coming taper of QE and sure enough on it came.  Today, the market is left to decide whether or not they are serious about raising the Fed Funds rate sometime in 2015.  The dot plot has them guiding us to 3.75% out in 2017.

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Fed Balance Sheet & Gold

Gold led the massive Fed balance sheet expansion in 2008, rolled upward in concert with the more gently expanding balance sheet and then topped out and dove as the Fed balance sheet kept on… well, you know.

So, despite the promotion of QE 3 gold (and silver) tanked into a bear market.  The question is whether or not gold is still leading the Fed’s balance of ‘asset’ holdings or whether gold through various – and well documented – official manipulations like the inflation-sanitizing Operation Twist, has some catching up to do.

fedbal.gold
Fed Balance Sheet & Gold, courtesy of MacroTrends

Piketty on the Fed

At the risk of sounding like a socialist, a theme one might sense in my writing about Fed policy and its slam dunk for asset owners, let me just say that I obviously agree with Thomas Piketty in his now widely known assertion that this policy benefits the few, the asset owners and to put it in highly technical terms, screw everybody else.

[Video removed due to technical glitch; it can be seen at the link below]

Fed-induced wealth effect raw deal for 99% –Piketty

I would add as usual note that it was Fed policy that created the hazards that became the ‘Great Recession’ and would-be ‘Depression 2.0′ that “The Hero” saved us from.  This little tidbit always seems to get left out of public debates on the subject, including the video above.

The Fed built the distortions that broke the system and the Fed is coming with the solutions that will break it again, in one way or another and in at one time or another.

 

“Let’s Be Honest” –Andrew Huszar

“The real issue is that the Fed has expanded its tool kit so dramatically…”  –Andrew Huszar

In line with our theme of outlandish and immoral (in my opinion) Fed policy a former Fed official calls QE a backdoor bailout of Wall Street, which anyone with two functioning brain cells knows to be the case.  The Andrew Huszar Op/Ed (Wall Street Journal) Confessions of a Quantitative Easer is I suppose old news, but it illustrates what we have been hammering on for so long now; that Fed policy is serving to pump the stock market and pump up the wallets of asset owners.

QE gets about 10 times the notoriety of ZIRP, but I’ll still maintain that it is this evil tool in the Fed’s ‘tool kit’ that is the main and continuing blight on the system as it not only rewards asset owners and speculators, but punishes those least able to speculate due to limited funds.

dow.tbill

Please review this chart again and behold the rigged market.  Anyone arguing that the bull market in US stocks is normal is being intellectually dishonest.  Yet like agent Mulder I want to believe in the healthy bull story*, but I have to believe the data that has drawn the lines on the chart above.

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Automatic Stabilizer?

Guest Post by Doug Noland

Yellen comforts New York – and the Bulls.

Fundamental to modern thinking on central banking is the idea that monetary policy is more effective when the public better understands and anticipates how the central bank will respond to evolving economic conditions. Specifically, it is important for the central bank to make clear how it will adjust its policy stance in response to unforeseen economic developments in a manner that reduces or blunts potentially harmful consequences. If the public understands and expects policymakers to behave in this systematically stabilizing manner, it will tend to respond less to such developments. Monetary policy will thus have an ‘automatic stabilizer’ effect that operates through private-sector expectations. It is important to note that tying the response of policy to the economy necessarily makes the future course of the federal funds rate uncertain. But by responding to changing circumstances, policy can be most effective at reducing uncertainty about the course of inflation and employment. Recall how this worked during the couple of decades before the crisis–a period sometimes known as the Great Moderation. The FOMC’s main policy tool, the federal funds rate, was well above zero, leaving ample scope to respond to the modest shocks that buffeted the economy during that period. Many studies confirmed that the appropriate response of policy to those shocks could be described with a fair degree of accuracy by a simple rule linking the federal funds rate to the shortfall or excess of employment and inflation relative to their desired values.” Janet Yellen, April 16, 2014

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