TNX to Ben Bernanke: “Screw you…”
Here Rex Nutting argues that the Fed will not taper QE any time soon because their targets are further away now than when QE3 began.
He argues that bond yields are not normal and are reflective of a struggling economy.
“A normal economy would mean normal bond yields of around 4% to 5% for the benchmark 10-year Treasury, instead of the current 2.2%, or last month’s 1.7%.”
He seems to think the market can simply decide when higher rates are in order but that its current expectation of rising rates is somehow wrong. But what is QE? Bond buying is what it is. What does bond buying do? It drops rates. What does a lack of buying do? It raises rates. Simple supply and demand.
“But the market’s expectations for much higher rates ignore just how far the economy is away from normal. In fact, right now the Fed is even further away from its dual goals of full employment and stable inflation than it was last September when it announced the QE3 bond buying program.”
And just maybe Rex, the Fed is smart enough to know that pure bond buying is not the ultimate answer to getting the inflation to take. I mean, do you see the lunacy of your statement when juxtaposed against the premise of the entire article and indeed the point you are trying to make?
QE is obviously not working, so the Fed has to keep on promoting QE.
Ah, WTF? Just maybe the game is in transition and the next phase will feature that free money that the banks have ingested being marked up (by higher long term interest rates) and finally sent out into the economy. At least that makes some sort of sense. ‘Keep doing what you are doing because it isn’t working’ makes no sense whatsoever.
The following is the opening segment to this week’s premium letter, NFTRH 242. The balance of #242 went on to discuss the technical status of US and global stock markets, key commodities, the current status of ‘inflation expectations’, precious metals and currencies; all in detail.
Taper to Carry
Last week we introduced the theoretical ‘taper to carry’ scenario whereby the Federal Reserve would indeed ‘have the balls’ to begin the end of traditional QE and transition the inflation via a new set of mechanics. Mind you, we still get inflation under this scenario, but it would be less stealth and more honest and obvious to the public. Here are the theoretical components of the play…
- Simultaneous ZIRP & QE have served to liquefy banks and maintain tepid economic growth while capping inflationary pressure, as banks hold significant reserves ‘in house’ until conditions are ‘right’ (read: profitable).
- There would be much public hand wringing about rising interest rates, which could undo the debt-leveraged economy. There would be a lot of noise in the perma-bear and gold bug camps that the Fed would not dare to taper QE.
- Yet taper they do, with the knowledge that the next ‘fix’ is already in. The rising long-term interest rates that would result from such action (tapering of bond purchase program, AKA QE) would immediately benefit the banks as they ‘carry’ the free money received from the Fed on the short end and roll it into profits by lending at higher interest rates on the long end.
- This process can be regulated as policy makers see fit. It is a “taper” after all!
All of the above imagines what could be an actual plan being promoted behind the scenes by entities far removed from this simple newsletter writer and his thoughts about what they will or maybe even should do. But I have yet to come up with (or be advised about) reasons why this scenario should be disqualified as a valid and rational ‘next step’ in the ongoing and systematic inflation attempt currently in progress.
I think that the last bullet point above is very important. Think about it; the smart man running the Federal Reserve has even introduced a word (taper) [edit: whether Ben Bernanke has actually used this word is irrelevant; its implication is front and center] that implies the process of transitioning the inflation from one form to another would be regulated as needed. He may be attempting control the pace of transition so things do not get too hot or too cold at any given time. Genius! If it works.
I think there may be recognition on the part of officials that the game of printing money out of old, bloated and un-payable debt while hammering gold (the early warning inflation barometer) is getting long in the tooth. Of course, this is not out of any sympathy for the gold bugs but rather a realization that a ‘lukewarm and rudderless’ economy against a systematic backdrop of debt monetization and money creation is not going remain politically expedient.
Enter our friends the Pigs (AKA the main players in the last doomed inflation and subsequent liquidation, the banks). This is simply the Greenspan playbook warmed over. Greenspan used different mechanics to create his credit bubble but the play was to get the banks to profitably ‘carry’ the spread and lend out into the economy. There is nothing new under the sun today if our ‘taper and carry’ thesis is viable and likely.
Last week the BKX ratio to the S&P 500 (candlesticks) took a hit but remained above the breakout line and this should remain a barometer to a confirmation of our would-be ‘carry’ play or a negation of it. So far so good. Long-term interest rates (blue line) also got through another week in breakout territory.
Against this backdrop let’s remember that the Fed is only jawboning a QE taper, not an end to inflationary ZIRP. This looks like a well-scripted plan by intellectual inflators that are much more sophisticated than the great Maestro of the previous inflationary era. But then they have to be sophisticated because things are so much more leveraged in rising debt with the cost of failure a likely unwinding of the current system.
‘All or nothing’ is the play and these players are winning (duh). Gold bugs and their quaint notions of honest money are losing (for now). Stock market bears – outside of an expected summer correction (which could play well into the script outlined above as inflation is best promoted against a worried public) may lose as well, at least for however long a new inflation cycle lasts.
If and when the banks become incentivized to get the inflated funds ‘out there’, asset prices are going to go up. This is what being bullish means in the current era, basically taking advantage policy designed to prop asset prices; i.e. inflationary policy.
Bear in mind that all the above is where a letter writer’s logical thought process has taken him. But here is the thing, I sit down each weekend to write a letter, not make policy. I observe financial markets with an attitude of trying to find the honest answers as to what is going on in a very complex macro financial world. But I do not have the answers. I only have my own logic, which could prove to be wrong.
But for another week at least, the theory lives on. What would be even better for the theory is if in the days or weeks ahead the Fed jawbones continue to promote a ‘taper’ to QE, T bonds continue to drop (rates up) financial markets correct on this noise and the banks out perform the S&P 500, indicating the next inflationary solution. It’s a tall order, but I’d rather have a game plan that can be revised or discredited than to be flying blind.
Aside from various indicators that seem to be working better now, a new and potentially critical ripple entered the analysis this week as I was analyzing long-term T bond yields. Hint: Remember the inflationary Greenspan era? Remember the ‘no-lose’ carry trade for the banks?
I am sure this theme will start getting fleshed out here on the blog going forward. But for now, it is making its appearance in NFTRH along with some conclusions. It is never too soon to start looking around the next bend.
Are we convinced yet that there is no inflation? Well, if not every last player then most seem to be convinced. But I wonder if the TIP-TLT ratio is making a bottom here? I also wonder if just maybe the Fed’s exit strategy noise is timed with a bottom in inflation expectations?
Could the stock market bubble they are blowing be indicating more undesirable guests (like commodities) are going to join the party and they want to tamp things down a bit? Just asking questions here.
I have made no bones about the fact that some of the tools I have depended on have stopped working, at least temporarily. For example, the gold-silver ratio would normally have croaked junk bonds and the stock market by now. For another, the 30yr-2yr yield spread would have pulled gold up as opposed to its current bear market state. There have been other indicators that have just stopped working and the temptation is to rave “Bernanke this!” and “Bernanke that!”
But that does no good. Bernanke is winning (duh) and he is the man on the cover of the Atlantic, smugly grinning out from behind the bold headline The Hero. I on the other hand am just a schmo with some broken tools. But I also have nominal technical charts that have helped avoid the hazards that we might believe active policy making have wired in to the markets.
By the way, speaking of indicators that don’t seem to make sense, why on earth are T bonds (which do not like inflation) and commodities (which do) both getting hammered today?
The hit to commodities of course has something to do with the strength in the USD* (which we have noted over the last several weeks is on a bullish – not bearish – signal by weekly chart), but what on earth is up with T bonds if inflation is not an issue? Could it be that somewhere in the T bond market lies the future undoing of the Hero’s myth?
I am going nowhere with this post other than it is an over-stimulated market with policy makers front, center and every which way screwing with normal market management. Within that context, survival in the short term in service to proper positioning in real value over the long term is vital.
Gold bugs may be right with the hysteria (like that showing up in my inbox) about Cypress being the first leg kicked out from under the neatly set table, and oncoming confiscatory policies. But those that went all in with ideology are paying the dearest price in the interim. This is speaking of the paper markets, anyway. Gold is gold (value) in the monetary realm and ain’t nothing gonna change that.
The play remains to be intact first and ready to capitalize second. That is because the other way around, trying to capitalize (on ideology) first and be intact second is not working and has not worked for over a half a year, and has not worked well for 2 years.
* Here is the weekly USD chart from NFTRH 230, created 7 weeks ago noting a bullish moving average cross.