Archive for the ‘Monetary Policy’ Category

The Fed’s Multi-Trillion Dollar Ponzi Scheme

Monday, August 22nd, 2016

“You loan me ten bucks. I photocopy the bill four times, give you back one of the copies, and announce that we’re square. That’s monetizing the debt.”                                                                                                                                                                         From Lionel Shriver’s The Mandibles

In the private sector, it would be called a Ponzi scheme.  When the Federal Reserve Board does it, it’s called “monetizing the debt.”

The Balance explained that, “The Federal Reserve monetizes debt any time it buys U.S. Treasuries. When the Federal Reserve buys these Treasuries, it doesn’t have to print money to buy them. It issues credit and puts the Treasuries on its balance sheet. Everyone treats the credit just like money, even though the Fed doesn’t print cold hard cash.”united-states-money-supply-m1@2x (1)

The process lowers interest rates, because the bonds taken out of circulation reduce supply, driving demand higher. But if reducing the supply of bonds drives prices higher and interest rates lower, shouldn’t more dollars drive the value of the dollar lower and the price of goods higher?

Logically, if you were to double the supply of money tomorrow, a dollar should be worth half of what it is worth today.  Prices would double, so the rate of inflation would be 100%.

And yet even with boatloads of new money, the inflation rate has barely budged.  The M1 money supply, which includes cash, checking accounts and other liquid monetary assets, is about 245% higher than it was eight years ago, when the Federal Reserve Board began its easy money policy.  Meanwhile, the Fed has been reluctant to increase interest rates in part because it has not been able to reach its targeted inflation rate of 2%. (more…)

What Yellen Should Have Said

Monday, June 22nd, 2015

The question reporters should be asking now is, what did the Federal Reserve Board’s Open Market Committee do for two days last week?

The statement it issued based on its meeting is a rehash of its last statement, which itself was not worth repeating.  Check the link from The Wall Street Journal, which you can use to compare the two most recent statements (as well as others), and you’ll see that the Fed mailed it in this time.

Yellen

These folks are managing our economy.  The fate of the world is in their hands.  And the best they can do is come up with an update to a previous statement.  No wonder the economy has practically flatlined throughout the current “recovery.”

It’s worth adding, though, that the Fed’s Seinfeld approach of having meetings about nothing may be better for the economy and for the American taxpayer than the previous chair’s pronouncements about Operation Twist and unlimited QE programs.

The latest Fed statement starts with this: “Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat.”  Really?  What does “has moderated somewhat” mean?  And where is the “information” received from?  NSA wiretaps?  Drones?  Ben Bernanke’s blog?

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Central Bankers: Masters of the Universe

Monday, June 15th, 2015

Earlier this month, along with our usual dire observations about an economy that has come unhinged, I noted that the world was not coming to an end.  On closer inspection, I may have been wrong on that one.

One sign that all is not right in the world of investing is the increasing volatility.  Volatility is not a good thing for investors seeking to limit their risk and markets recently have been as spiked as Jonestown Kool-Aid.  The results could be nearly as disastrous. Volatility

As the chart shows, currency, oil and interest rates have been up, down and all around.  Bonds, too, have been volatile, and price shifts have been taking place with increasing frequency.

It makes me uncomfortable when I see government bonds flash crashing along with currencies of developed markets with enormous debt levels.  The Swiss National Bank’s unpegged its currency and, if Japan keeps burning yens, China is likely to unpeg its currency. When that happens, it isn’t going to be fun.

Why is this happening?  Because central bankers have become the masters of the universe.  Make that Masters of the Universe.

As Zerohedge notes, “For the last few years, valuations in more and more markets seem to have stopped following traditional relationships and instead followed global QE.  Likewise in meetings with investors, we have been struck by how little time anyone spends discussing fundamentals these days, and how much revolves around central banks.  Record-high proportions of investors think fixed income is expensive and think equities are expensive.  A growing number of property market participants seem to think real estate is expensive. And yet almost all have had to remain long, as each of these markets has rallied.  Could it be that central bank liquidity has forced investors to be the same way round more so than previously, and that this is making markets prone to sudden corrections?”  (more…)

Bubble Busters

Monday, March 30th, 2015

“I had a stick of CareFree gum, but it didn’t work. I felt pretty good while I was blowing that bubble, but as soon as the gum lost its flavor, I was back to pondering my mortality.”                                                                                                                                                                             Mitch Hedberg

When the news about U.S. markets and the U.S. economy is depressing, I usually read about Europe and feel better about the U.S.

I spent a lot of time reading about Europe this week, but it didn’t do much good – even with Greece continuing to defy logic by pretending that it’s OK to live off of someone else’s money.

The problem is that easy money policy is not so easy anymore.  It never did prop up the U.S. economy, in spite of Keynesian enthusiasm, but at least it created the illusion of economic health by propping up the stock market.  Now, it’s unable to do even that. burst-your-bubble

U.S. markets fell throughout the week, but especially on Wednesday, which saw declines of more than 2% in the Nasdaq and Russell 2000. The Dow dropped nearly 300 points, or 1.6%, while the S&P 500 finished the day about 1.5% lower.  The New York composite stock exchange is now back to where it was last July and the S&P 500 is approaching November levels.

And there’s likely to be more trouble ahead, as a 4% drop in the biotech and semiconductor sectors showed a “classic parabolic reversal,” according to Peter Boockvar, chief market analyst at the Lindsey Group.  A parabolic reversal is a technical indicator that signals a change in an asset’s momentum.

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No Animals Harmed in Drafting Fed Policy Statement

Monday, March 23rd, 2015

Thousands of years ago, Roman soothsayers would visit the oracles and interpret the entrails of slaughtered animals.  We haven’t advanced much since then.

Fortunately, no animals are slaughtered today, but many brain cells seem to die in the reading and interpretation of policy statements of the Federal Open Market Committee.  Like the soothsayers of old, today’s economists, journalists and pundits interpret the news and report it as fact – even though they generally haven’t a clue about what’s being said.  We’re not even sure the FOMC has a clue about what’s being said. Animal

The policy statements themselves are an anachronism.  In today’s world, most news is immediate.  By the time a newsworthy event ends, it’s been tweeted, blogged and reported on by anyone and everyone who is interested.

Yet the Fed issues policy statements on its Federal Open Market Committee meetings two months after the meetings take place.  Apparently, it takes the FOMC that long to agree on language that says nothing and can be interpreted however the reader would like it to be interpreted.

Many well-paid experts make a living off of these interpretations.  They will tell you, with certainty, that the Fed will definitely maybe raise interest rates sometime this year – or maybe next year – but they’re just guessing.

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Swiss Diss

Tuesday, January 20th, 2015

“It is said that the Swiss love only money … this is not true. They also love gold.”                                                                                                                          Anonymous

 The last time we checked, Switzerland was still part of Europe.

Then again, Switzerland has long been different from its European brethren.  Switzerland is historically an observer, not a participant.  Neutrality gives the country points for ethics among the peace-loving folk – although it didn’t stop the Swiss from dealing with the Nazis during World War II. Swiss Franc

Switzerland is also “the vault of the world.”  It’s where money and wealth are omnipresent, but never talked about.  “Swiss” and “bank” go together like “Swiss” and “watch.”

But there’s a big difference between the Swiss National Bank and the European Central Bank.  While the ECB is likely to announce a quantitative easing program to fight deflation next week, Switzerland this week strengthened its currency with a surprise announcement that it was removing its cap on the value of the Swiss franc.

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Less than “Less than Zero”

Friday, September 5th, 2014

In June, the ECB lowered the interest rate on bank deposits, including reserve holdings in excess of the minimum reserve requirements, from zero to -0.10%.  This week, surprising just about everyone not named Mario Draghi, the ECB lowered the rate by another 10 basis points to -0.20%.

14950766600_d52f0bba78_zAs we wrote when the less-than-zero rate was announced, “banks will pay a fee on money they fail to lend out.  Whether or not that stimulates the economy, it could encourage banks to take more risk, approving loans that otherwise may not have been approved.  Isn’t that what caused the financial crisis?”

Zerohedge explained that while rates were already negative, “Now they’re even more negative. Because in the world of Central Banking if something doesn’t work at first the best thing to do is do more of it. Whatever you do, DO NOT question your thinking or your economic models at all.”

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Sprinkling the Fairy Dust of Illusory Riches

Thursday, July 3rd, 2014

When the Bank for International Settlements (BIS) calls central bank market rigging “the fairy dust of illusory riches,” it’s time to pay attention.

The BIS is the central banks’ central bank.  Its role is “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.”

To provide the statement with some context, and to alert you about what else you can expect from central banks moving forward, we provide a summary of other key points made in this year’s BIS annual report, which is appropriately titled, “In Search of a New Compass.”Compass

First, there’s recognition that easy money policy has gone far enough.  That’s self-evident, but of special interest when you consider the source.  BIS notes that despite a pickup in economic growth, the world economy “has not shaken off its dependence on monetary stimulus.  Monetary policy is still struggling to normalize after so many years of extraordinary accommodation.”

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Prozac Nation

Friday, June 27th, 2014

It’s all stress-free bliss these days … at least for anyone who’s not paying attention.

Has someone been putting anti-depressants in the water supply?  That’s one way to explain Wednesday’s non-reaction to the report that the economy shrank by 2.9% in the first quarter – not the 1% drop previously reported.

It would also explain continued investor complacency reported last week, with the VIX (volatility index) approaching single digits.  And it would explain the plunge in junk bond yields to 5.6%, which is a full 3.4% points lower than the decade-long average of 9%.

GDP GrowthYet investors showed that they still have a pulse, when they took the Dow down 100 points after James Bullard, president of the St. Louis Federal Reserve, announced that an interest rate hike may take place in the first quarter of 2015.

So consider this in context.  In addition to the slumping economy, we have Russia’s continued takeover of Ukraine, which is now being overshadowed by the continued takeover of Iraq by Muslim terrorists known as ISIS and the possibility of U.S. military intervention.  We have civil war continuing in Syria and continued nuclear development in Iran, in spite of the lifting of sanctions.  We have U.S. veterans in need of medical treatment being ignored while the Veterans Administration fudges numbers.  We have the missing e-mails of Lois Lerner and six other IRS employees who allegedly targeted conservative groups.  We have continuing fallout in the healthcare industry from the pains of implementing Obamacare.  We have a stock market so overblown that price-to-earnings ratios are at levels higher than they’ve been through 89% of the history of the S&P 500.

So what’s moving the market?  A statement made by a Fed board member that repeats a statement he previously made.

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Mario the Magnificent

Friday, June 6th, 2014

It will take more than higher prices to cure what ails the European economy, but Wall Street reacted to the European Central Bank’s inflation-boosting efforts by setting new records yesterday.

Action by the ECB has been widely anticipated since last month, when ECB President Mario Draghi announced that the ECB would be “comfortable acting” at this month’s meeting.  With a report this week that Eurozone inflation was just 0.5%, action by the ECB was all but certain.  The ECB’s target rate of inflation is just under 2%.

Mario Draghi

Mario Draghi

Anticipation of ECB action has been helping to prop up the U.S. market at a time when the Federal Reserve Board is winding down its quantitative easing program by reducing its purchase of bonds by $10 billion per month.  Apparently, as long as someone is following easy money policies, the markets are happy.

The actions announced by ECB President Mario Draghi did not include bond buying (although there are no Eurozone bonds).  That’s in keeping with previous actions by Draghi, who previously relied on “forward guidance” to boost European markets and achieve monetary goals.

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