Tag Archives: federal reserve

Fed Nonsense and Error Bars

By Michael Ashton

Wages follow inflation, rather than leading it

[Yesterday’s] news was the Employment number. I am not going to talk a lot about the number, since the January jobs number is one of those releases where the seasonal adjustments totally swamp the actual data, and so it has even wider-than-normal error bars. I will discuss error bars more in a moment, but first here is something I do want to point out about the Employment figure. Average Hourly Earnings are now clearly rising. The latest year-on-year number was 2.5%, well above consensus estimates, and last month’s release was revised to 2.7%. So now, the chart of wage growth looks like this.

ahe

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The Original Fed vs. Today’s Fed

By Steve Saville

The Federal Reserve Act of 1913 was a foot in the economic door

In a recent blog post, Martin Armstrong wrote: “This constant attack on central banks is really hiding what the problem truly is — government. When the Fed was created, it “stimulated” the economy by purchasing corporate paper. The Fed was NEVER intended to buy government bonds. The politicians did that for World War I and never returned it to its purpose.” That’s not entirely true. Also, it’s naive to believe that the Fed would benefit the overall economy if it were restricted to its originally-intended purpose.

Contrary to Mr. Armstrong’s assertion, the Federal Reserve Act of 1913 actually does enable the Fed to buy government paper. Specifically, Section 14 of the Act states:

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A Good Time to Remember

By Michael Ashton

There are a whole lot of people in the market today, many of them managing many millions or even billions of dollars, who have never seen a tightening cycle from the Federal Reserve.

Some days make me feel so old. Actually, most days make me feel old, come to think of it; but some days make me feel old and wise. Yes, that’s it.

It is a good time to remember that there are a whole lot of people in the market today, many of them managing many millions or even billions of dollars, who have never seen a tightening cycle from the Federal Reserve. The last one began in 2004.

There are many more, managing many more dollars, who have only seen that one cycle, but not two; the previous tightening cycle began in 1999.

This is more than passing relevant. The people who have seen no tightening cycle at all might be inclined to believe the hooey that tightening is bullish for stocks because it means a return to normalcy. The people who have seen only one tightening cycle saw the one that coincided with stocks’ 35% rally from 2004-2007. That latter group absolutely believes the hooey. The fact that said equity market rally began with stocks 27% below the prior all-time high, rather than 32% above it as the market currently is, may not have entered into their calculations.

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Not Everyone Thinks the Fed Will Win

By Michael Ashton

Subtle Clues: Not Everyone Thinks the Fed Will Win

The illiquid trading of December is already well in evidence – and we haven’t even reached the bad part yet. One we are past the CPI report and the Fed meeting, there will be a few days where serious traders are squaring up based on what they now believe after those data points. After that, it will get truly quiet for the last couple of weeks.

A little quiet is what the energy market needs. On Monday front Crude broke to new six-year lows. Not since oil bottomed at $32.40 in December 2008 have prices been this low. Prior to that, the last time we saw sub-$40 oil was in July 2004. Ditto with gasoline prices, which are averaging just a touch above $2/gallon nationwide. This is truly amazing, and is causing all sorts of carnage in energy and energy service companies as has been widely reported.

What is interesting, though, and has been widely unreported has been the impact these recent price declines have had on inflation expectations as impounded in the price of inflation derivatives and TIPS breakevens. In short: not very much.

Continue reading Not Everyone Thinks the Fed Will Win

Swimming Naked

By Michael Ashton

But what happens when the tide goes out?

I almost never do this, but I am posting here some remarks from another writer. My friend Andy Fately writes a daily commentary on the FX markets as part of his role at RBC as head of US corporate FX sales. In his remarks this morning, he summed up Yellen’s speech from yesterday more adroitly than I ever could. I am including a couple of his paragraphs here, with his permission.

Yesterday, Janet Yellen helped cement the view that the Fed is going to raise rates at the next FOMC meeting with her speech to the Washington Economic Club.  Here was the key paragraph:

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The Fed’s Massive Shift

By Steve Saville

The Fed’s Massive and Unprecedented Shift

This post is a slightly-modified excerpt from a recent TSI commentary.

In the US, the commercial banks can create money and the Fed can create money. A chart showing the change in the US money supply therefore won’t directly tell us if the Fed was a creator of new money during the period covered by the chart. However, unlike the commercial banks, when the Fed monetises debt it boosts bank reserves as well as the money supply, which means that we can quickly identify the periods during which the Fed was a direct creator of new money by looking at a chart of the total quantity of US bank reserves. Such a chart is displayed below.

Continue reading The Fed’s Massive Shift

Janet Yellen Responds as a Central Banker Would

By Biiwii

Janet Yellen goes on the defensive…

Let’s try to untangle the web of Fed-speak going on here.  “Reality” for our purposes is defined as my opinion, obviously.

Yellen Defends Seven Years of Low Interest Rates in Letter to Nader

Fed-Speak:

Warning that “an overly aggressive increase in rates would at most benefit savers only temporarily,” she argued in the letter released Monday in Washington that the Fed’s seven-year era of zero rates had sheltered American savers from dramatic declines in the value of their homes and retirement accounts.

Reality:

It was a thing called deflation, which is a natural corrective to man-made, currency-compromising monetary policy that leverages the ‘value’ inherent in official ‘money’ in service to asset appreciation.  Periodically, this ‘money’ becomes valued as liquidity as the monetized economy deleverages from the official Fed-sponsored inflation (in this case, Alan Greenspan’s commercial credit bubble).  In other words, the “value of their homes” was a false economic signal to begin with.  So what she is saying is that the Fed’s seven-year era of zero rates have been a tool employed to forestall, you guessed it… reality.

Fed-Speak:

“Many of these savers undoubtedly would have lost their jobs or pensions (or faced increased burdens from supporting unemployed children and grandchildren),” if the Fed had not acted with such force, she wrote.

Reality:

Yes indeed, they would have.  That would have been due to the fallout from from the last time the Fed acted to delay an economic deleveraging.  So what you are saying Ms. Yellen, is that you have employed a different flavor (government vs. commercial credit) of the same solution that was in actuality, the cause of the problem to begin with.  See?  The consumer is now hopped up on government credit instead of mortgage products on this cycle.  From FloatingPath

government credit to the consumer, answer to janet yellen

Fed-speak:

Repeating that she and most of her colleagues expect the pace of policy tightening to be gradual after liftoff, Yellen said “overly aggressive” rate hikes could also undercut the economic expansion and force the Fed to reverse course back to zero, drawing a parallel with Japan, where rates have been stuck near zero for the past 25 years.

Reality:

It’s a Kabuki Dance.

janet yellen does a kabuki dance

Fed-Speak:

Yellen’s letter responded to a plea from a “group of humble savers” that included consumer advocate Ralph Nader frustrated by low returns gained from traditional bank deposits and money-market accounts.

“We want to know why the Federal Reserve, funded and heavily run by the banks, is keeping interest rates so low that we receive virtually no income for our hard-earned savings while the Fed lets the big banks borrow money for virtually no interest,” it read. “It doesn’t seem fair to put the burden of your Federal Reserve’s monetary policies on the backs of those Americans who are the least positioned to demand fair play.”

Yellen told the group that lower borrowing costs helped make large purchases more affordable for American consumers, supporting the economy and creating “millions of jobs.”

Reality:

I didn’t know Ralph Nader was still around.  I remember him from when I was a kid, and I am pretty old.  To answer your question Ralph, the Fed has been keeping rates so low in order to make sure that enough of the economy deleverages from previous Fed-induced moral hazards.  The Fed has held savers in suspended animation in an effort to make powerful and abusive interests whole again.  It is these interests that matter to the Fed, not regular people.

As to the last paragraph, the average American consumer cannot make large purchases without ample credit (see graph above).  Households are no doubt better off today than they were in 2009 but again, we are talking about the cure being the disease.  Yellen is justifying a new flavor of the policy that created the “Great Recession” as the media came to call it.  It was not a great recession, it was a deflationary episode that unwound the Greenspan Fed’s excesses, and then deflation was kicked down road by the Bernanke/Yellen Feds as if it were just an empty can of Budweiser.

Zero Hedge Creates Drama Out of Nothing

By Steve Saville

[biiwii comment: Gary T, Otto Rock and Steve-O Saville… not expecting a plethora of Christmas cards from certain corners of the financial media and sub-media]

There was a post at ZeroHedge.com on 20th November titled “Fed To Hold An “Expedited, Closed” Meeting On Monday“. The title suggests that something strange is afoot, that is, that the Fed is up to something out of the ordinary. Hence the emphasis on the words “Expedited” and “Closed”.

To make sure that its readers get the message, the post goes on to state:

Given how awesome everything appears to be, judging by stocks and the tidal wave of FedSpeak of the last week confirming that rates are rising in December, we found it at least marginally ‘odd’ that out of the blue, the Fed would announce an ‘expedited, closed’ meeting on Monday…

Odd? Out of the blue? Really?

The author of the ZeroHedge post forgot to mention that these “expedited, closed” meetings happen with monotonous regularity. The one scheduled for Monday 23rd November will be the third one this month. And there were four in October, three in September, two in August and five in July. You can find the notice for the coming meeting and the records of previous similar meetings at http://www.federalreserve.gov/aboutthefed/boardmeetings/201511.htm.

Even the topic under discussion at the 23rd November meeting will be routine. The purpose of the meeting is: “Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.” A meeting with the same purpose happens every month. For example, there was one on 26th October, one on 15th September, one on 31st August and one on 27th July.

Always be aware of the agenda/bias of the news sources you use.

Replacing “Despite” With “Because of”

By Steve Saville

Way back in early-2009 and again in mid-2012 I wrote in TSI commentaries that if the story unfolded as I expected then a lot of future economic commentary would begin with the word “despite”, and that in most cases the commentary would be a lot closer to the truth if “despite” were replaced with “because of”. For example, a comment along the lines of “despite the huge monetary stimulus the economy remains weak” would be closer to the truth if it read “because of the huge monetary stimulus the economy remains weak.”

My 2009 assessment remains applicable in that most commentators still don’t get it and still use “despite” when they should be using “because of”. They still don’t realise that pumping money into the economy falsifies prices (including the price of credit, the most important price of all) in ways that make the economy less, not more, efficient. The reality is that the more the central bank tries to stimulate the economy via ‘loose’ money, the more it will HINDER economic progress.

A sensible way to use the word “despite” is in reference to plans for future stimulus. For example, it could reasonably be said that DESPITE the lack of logical support for creating money out of nothing and the evidence that previous QE programs did not help, it’s a near certainty that the Fed will introduce a new monetisation program if the economy gets much weaker. It could also be said that the US economy’s only hope is that the remnants of capitalism are strong enough to generate sustained improvement DESPITE the price distortions caused by the Fed.