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.
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.
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.
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.
“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.
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.
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
So is whatever spooked Dennis Gartman on Friday behind us now? The dovish Fed story is getting played today. It’s the ‘beat the crap out of ‘em and then wash-rinse-repeat’ market. Longs, shorts, everybody into the spin cycle. All because this market is still 100% enthralled with these clowns and that makes it difficult to manage.
SPX held support (60 min. view below), Semiconductors never lost the uptrend and now the Fed comes with some dovish love making for the market. A bounce at the least was in the bag.
But the SPX did hold at support as everyone should have noted and so people who missed the downside kick off should not have been shorting it above support. Only on a breakdown should the market be shorted; a breakdown followed by shortable bounces.
Guest Post by James Howard Kunstler
Guess what? There is none. Rather, the Federal Reserve practice of Delphically divulging its intentions ought to be understood as the master pretense of US economic life — the delusion that wise persons are actually in control of anything. The result of this guidance continues to be the mis-pricing of everything, especially the cost of money as represented in the operations of debt, and hence the value of everything denominated in money.
Guest Post by Doug Noland
Equity market internals have turned increasingly unsettled.
In last Wednesday’s press conference, Janet Yellen upset the markets with her comment suggesting that the Fed might commence rate adjustments as early as six months after it concludes its latest QE program. Several officials have since tried to reassure market participants that the Fed has not moved forward its plans to raise rates. Even hawkish Fed officials went to pains to communicate that rate moves were not in the immediate offing.
Yesterday Michael Ashton’s views were posted. Today, thanks to an NFTRH subscriber’s heads up we note Vince Foster at Minnyanville. These guys are what I consider expert interest rate watchers.
We do not have permission to directly publish so the material is linked instead.
MarketWatch has a nice article clearly laying out the ways that Grandma’s savings are compromised by monetary policy designed to bail out borrowers and reward speculators at the expense of people just trying to live by the old rules.
How the Fed is hurting seniors
Let’s be honest and call ZIRP what it is; an immoral manifestation of modern finance that rewards banks, inside players and speculators that jump on board for the ride. This is why I have to laugh (or cry) every time some bull wise guy tries to legitimize the bullish atmosphere as being something normal or moral.
It is not. It was created by decree of man to the enrichment of some and the detriment of many. Other than that I have no strong opinions on the matter.
The HUI Gold Bugs index got Ukrained to the extent that global crisis hype seeped into this market leading into the weekend. The S&P 500 got Ukrained the other way as people actually acted as if the Crimea question is a macro fundamental.
I think after today the books are square on Ukraine but not yet the FOMC meeting, which will provide another hype opportunity. Will they or won’t they ruminate about an eventual hike to the anti-Grandma Fed Funds rate, AKA ZIRP?