By Alhambra Investment Partners
I am more convinced than ever that the FOMC is simply trying to scare a recovery into existence. The June update to the Fed’s models for central economic tendencies were, in a word, atrocious. The economy was marked down in almost every facet, and not by a little. The upper boundary on the central tendency for GDP was dropped by 0.7%, all the way to just 2% from 2.7% at the March update. That means, given the current thinking which somehow includes an economy strong enough to consider ending ZIRP (from an orthodox perspective), this year is going to be worse than last year.
Somehow out of all that word salad statement, we are to assume that the Fed is even more convinced that the economy has only gotten better if only because it got worse?
Continue reading Animal Farm was a Template
Blah blah blah… growth is… blah blah blah… to support progress toward maximum employment… blah blah blah… interest rates… blah blah blah…
Here, read the FOMC statement for yourself…
For Immediate Release –FOMC
Further, here is the live blog that will be doting on Yellen for the next half hour. Personally, I have better things to do.
By Michael Ashton
Which June Did You Mean, Charles?
Yesterday, Chicago Fed President Charles Evans gave a speech in which he said that he probably leaned towards making the first tightening early next year, as there is “no compelling reason for us to be in a hurry to tighten financial conditions.” The Fed, he said, probably shouldn’t raise rates until there’s a “greater confidence” that inflation one-to-two years ahead will be at or above 2%. This isn’t a surprising view, as Evans is the progenitor of the “Evans Rule” that says rates should stay near zero until unemployment has fallen below 6.5% (it has) or inflation has risen above 2.5%. Yes, those bounds have been walked about; in particular the 6.5% unemployment rate is obviously no longer binding (he sees the “natural rate” as being 5% again). But the very fact that he promoted a rule that set restraints on a mere return to normal policy means that he is a dove, through and through. So, it should not be surprising that he isn’t in a hurry to tighten.
Continue reading Which June, Charles?
 I have had some complaints about writing that I “like” Bernanke and Obama. That is telling of how divisive today’s financial and political climates are. I did not write ‘I like the jobs they have done’, after all. I have not “liked” the job a Fed chief or President have done since I can remember. It was wording in a post simply implying that I think they are probably nice men. Sheesh… it would help if some people would actually make the effort to pick up on nuance. It’s a post answering the assertions of a former Fed chief destined to see the annals of history one day revoke his “Hero” status.
I have always liked Ben Bernanke, in that I think he is a soft-spoken, nice guy who took the hand off from Alan Greenspan in stride, heroically making chicken soup out of the chicken excrement he was left with. He kept his dignity and calm demeanor during the days when inflationist gold bugs codified the term “Helicopter Ben” and turned it into just another accepted way of saying “Ben Bernanke”.
Mr. Bernanke met the impossible challenges left him by the Greenspan Fed and the Bush White House, and being a scholar of the Great Depression and an intellectual Keynesian, did what he was always meant to do. He employed tried and true Central Bank policy-making against a natural bust (i.e. reaction to Greenspan’s policy-induced 2003-2007 inflationary boom) of the system.
Continue reading Bernanke on Warren-Vitter & Last Resorts
By Steve Saville
Large Sums of Cash Are Hot Potatoes
There’s a line of thinking to the effect that Quantitative Easing (QE) is not inflationary because it involves the exchange of one cash-like instrument for another. Taking the case of the US, the Fed’s QE supposedly adds X$ of money to the economy and simultaneously removes X$ of “cash-like” securities, leaving the total quantity of “cash-like” instruments unchanged. However, even putting aside the fact that many of the securities purchased as part the Fed’s QE programs are not remotely “cash-like” (nobody with a modicum of economics knowledge would claim that a Mortgage-Backed Security was cash-like), this line of thinking is patently wrong.
Continue reading Cash Hot Potatoes
By Steve Saville
New tools for manipulating interest rates
At TSI over the past year and at the TSI Blog two months ago I’ve made the point that the Fed gave itself the ability to pay interest on bank reserves so that the Fed Funds Rate (FFR) could be raised without the need to shrink bank reserves and the economy-wide money supply. I explained that the driver of this change in the Fed’s toolbox was the fact that the massive quantity of reserves injected into the banking system by QE (Quantitative Easing) meant that it would no longer be possible for the Fed to hike the FFR in the traditional way, that is, via the sort of small-scale shrinkage of bank reserves that was used in the past. Instead, the quantity of reserves has become so much larger than would be required to maintain a Funds Rate of only 0.25% that even a tiny increase to 0.50% would necessitate a $1 trillion+ reduction in reserves and money supply, which would crash the stock and bond markets. The purpose of this post is to point out that while the payment of interest on bank reserves is now the Fed’s primary tool for implementing rate hikes, there are two other tools that the Fed will use over the years ahead in its efforts to manipulate short-term US interest rates and distort the economy.
Continue reading New Manipulation Tools
Another Scene From ‘Peak Fed': Dudley Signals ‘Go-Slow’ Approach
You see the humor of it all.
Policy makers’ shear predictability (good cops and bad cops always at the ready, with market events dictating which ones eat the mic at any given time. Or if you prefer the little clown car analogy, they drive to center ring, honk honk honk… and out they spill doing tricks and feats of daring do at every sensitive juncture when the market needs a little relief.
The hyper intense preoccupation the market (a collection of millions of decision makers and black boxes) has for the buttoned down eggheads, and its responses to each and every predictable Jawbone does not help people keep a handle on rational market management, but it is entertaining for now as long as you’re not positioned incorrectly (like long or short, ha ha ha).
It’s stupidly comical in the way it continues so predictably with people apparently still taking it seriously. Well, the mainstream media do, anyway. I guess they are not really people.
Dow down 100, ‘Fed may delay rate hike’ story gains steam, Dow up a 100. What’s the diff? At some point this skittish silliness is going to end and the market will choose a direction.
Here is what is actually happening. We are in a long and slow (and I mean slooooow) process of witnessing the zenith of confidence in the Fed (Peak Fed) as one day, even the dimmest, most sycophantic market participant is going to cotton on to the fact that these people are no more knowledgeable or in control than the rest of us (they just have a bigger bag and more tricks). Peak Fed → Confidence drains → Market gets about its business.
It’ll take patience though; sort of like how the ‘Peak Oil’ promotion took a long time to play out. By the way, consider ‘Peak Fed‘ as a © ™ of Biiwii.com. It’s a great theme, and it is happening in my opinion, right here and now. Best of all, it’s got very distinct investment themes going forward.
By Steve Saville
The ECB is trying to follow in the Fed’s bubble-blowing footsteps
This post is a slightly-modified excerpt from a recent TSI commentary.
The monetary data published by the ECB last week showed that the rate of euro-zone TMS (True Money Supply) growth continued to accelerate in February — to a year-over-year rate of 11.8%, from 11.4% in January and ‘only’ 6.4% last October. Here’s a chart that puts the current monetary inflation rate into perspective.
Continue reading ECB Following the Fed…
While we’re on the subject of Mr. Bullard, the opening segment from this week’s NFTRH (#335) had a little fun with the Fed. Serious multi-market and economic analysis came later, but sometimes you just need to shake your head in awe and wonder.
The Fed is important because millions of market participants believe it is important and a critical mass of people are under the illusion that its policies have put the “Great Recession” in the past and laid a path for a sustainably good economy going forward. In short, confidence in the Fed has never been more pervasive as it reaps the reward (the respect and confidence of the majority) for a job well done.
Never mind for now that previous Fed policy is what fomented the “Great Recession” (i.e. a near liquidation of the system) and the supposed remedy has been similar but more intensive policy using official credit as opposed to commercial credit as the stimulant.
Through this cycle I have watched Gold Bugs that used to rail against “Helicopter Ben” fade to black, the Bond Vigilantes who would short the long bond (including one over exposed Vigilante, formerly of PIMCO) get their hats handed to them and the general backdrop of distrust and revilement toward the Fed simply get erased somehow.
It’s as if a majority of market participants are little more than black boxes with certain coding for certain cycles. Today the code might look something like this…
<caption>Sit quietly and we will control all that you see and hear</caption>
Continue reading Peak Fed
Bullard (on dropping “patient” from the wording): “We’ll be able to make a move, but we don’t have to make a move.”
“I think there was some dovishness because those dots all moved down and… one of the things about those dots is, ahem, for, for me for instance, I had a, a [*] liftoff in March; so it was the March meeting and we weren’t lifting off so I couldn’t say March anymore and we already swore off April so I had to say June.
So that moved my whole path down and according to my model that was the best we could do given where we were so I said okay we’ll lift off in June and go on from there. Well, that moved my whole path down ah, you know, 50 basis points. So I’m not sure that I’ve become sort of more dovish, it’s just that the committee ah, didn’t move in March when I said, so I had to move my dots down. So I think there is some misinterpretation about what this dot movement really means.”
“So you think the market is confused when it comes to reading the dot path?”
Are you kidding me Jim ‘…err we can always come out with QE4…‘ Bullard?
What kind of oatmeal is this dribbling out of my favorite Hawk’s (or if you prefer, Bad Cop’s) mouth? Where’s Fisher? Let’s get him in here to lay down the law! Bullard’s letting the dots bully him.
 I almost forgot, Richard stepped down and now sits on the Pepsi board. I don’t have an opinion about whether Pepsi is better than Coke, but I do have the opinion that they have a sterner BoD.
* Sounds to me like he’s reading a script stored in his frontal lobe, with the ahems, ah ah’s and a, a’s a pause to access the memory banks.