Posts Tagged ‘Interest Rates’

The Apolitical Fed and the “Big, Fat, Ugly Bubble”

Monday, October 3rd, 2016

“ … nothing at the Fed is political.”                                                     Neil Kashkari, new head of the Minneapolis Fed

The Federal Reserve Board was designed to be a nonpartisan entity, existing solely for the benefit of the American economy. Apparently, there is a flaw in the design.

During the first debate between presidential candidates Hillary Clinton and Donald Trump, Mr. Trump accused the Federal Reserve Board of keeping interest rates near zero to help Democrats in November, while creating a “big, fat, ugly bubble” that will pop after the election when the central bank raises rates.

According to Ruchir Sharma, chief global strategist for Morgan Stanley, “This riff has some truth to it.”djia

“Since the Fed began aggressive monetary easing in 2008,” Sharma wrote on Zero Hedge, “my calculations show that nearly 60% of stock market gains have come on those days, once every six weeks, that the Federal Open Market Committee announces its policy decisions.

“Put another way, the S&P 500 index has gained 699 points since January 2008, and 422 of those points came on the 70 Fed announcement days. The average gain on announcement days was 0.49%, or roughly 50 times higher than the average gain of 0.01% on other days.”

It must be a coincidence that gains are 50 times higher on days when the FOMC announces policy decisions.

Sharma’s conclusions are further supported by this chart from, which shows an inflation-adjusted Dow Jones Industrial Average.  Note the upward surge that began when the Fed began QE in 2008. (more…)

Deceptive Pricing

Monday, September 26th, 2016

If you had to believe one of the following people, who would you choose?

Heather Bresch, CEO of Mylan, makers of the EpiPen: “The misconception about our profits is understandable, and at least partly due to the complex environment in which pharmaceutical prices are determined.”

John Stumpf, CEO of Wells Fargo: “First of all, this was by 1% of our people.”

Janet Yellen, chair of the Federal Reserve Board: “In general, I would not say that asset valuations are out of line with historical norms.”yellen

Two of the three people above were brought before Congressional committees so they could be scolded by U.S. Senator Elizabeth Warren and other upstanding, ethically pure members of Congress. Which two?

And finally, which of the three people above have had the greatest impact on you and on the economy?

Stumpf Grilled

Mr. Stumpf’s days as CEO of Wells Fargo are apparently numbered, because some of his company’s minions decided to open accounts for bank customers who never authorized them to be opened. This was done by employees to make quotas and earn bonuses. (more…)

Doubling Down on Bad Ideas

Tuesday, September 6th, 2016

Uh oh.

Until now, about the only thing good you could say about the Federal Reserve Board in recent years is that it hasn’t followed central banks in Europe and Japan by lowering interest rates below zero.

But that may be where we’re going next.

Fed Vice Chair Stanley Fischer told Bloomberg Surveillance last week that he and his Fed colleagues believe that negative interest rates are a legitimate tool for central bankers to use in their efforts to achieve full employment and economic health.Fischer

If by Fed colleagues, he means his imaginary friends, we should be okay.  But if he means his gal pal Janet Yellen et al, look out below.  Over the cliff we go.

Negative rates would be doubling down on failed policies. If you’re a political figure, like Fed Chair Yellen and her Fed brethren, it would be anathema to admit that you’re wrong about anything, so if something doesn’t work, you rationalize that you just didn’t pour enough gasoline on the fire and you pour more.

Anyone who has to pay for health insurance will recognize the doubling-down approach being used in the coming election by the Democrats who gave us Obamacare. The Affordable Care Act, to the surprise of no one who is not a Democratic member of Congress, has become unaffordable, with a majority of exchanges shutting down because they are losing money. But, with premiums increasing by about 30% this year in some states, Democrats believe the answer is more government control of healthcare. The insurers, of course, are the bad guys, because they are no longer willing to lose billions propping up Obamacare. (more…)

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…)

Grading on a Curve

Monday, July 18th, 2016

 “We do not target the level of stock prices.                     That is not an appropriate thing for us to do.”

                                    Fed Chair Janet Yellen

 It’s the equivalent of social passing or grading on a curve. While the stock market is breaking new records, its recent performance is not a reflection of reality.

As Larry Fink, chairman and CEO of BlackRock, told CNBC’s “Squawk Box,” “I don’t think we have enough evidence to justify these levels in the equity market at this moment.” Buybacks

He said the recent rally has been driven by institutional investors covering shorts (i.e., hedging bets that stock prices would fall), and not by bullish individual investors. In fact, he noted that outflows in mutual funds show that individual investors are becoming squeamish about stock prices.

Institutional investors were short going into Brexit, but are recalibrating their portfolios, Fink said, given that the Brexit aftershock has not been as long-lasting as expected. While some may have been concerned about the economic impact of the United Kingdom voting to leave the European Union, ultimately its impact on markets was muted by the knowledge that Brexit would most likely keep the Fed from increasing interest rates anytime this year.  (more…)

Theater of the Absurd

Monday, June 20th, 2016

Vladimir: “Well? What do we do?”

Estragon: “Don’t let’s do anything. It’s safer.”

From “Waiting for Godot” 

In Waiting for Godot, two men spend more than an hour talking nonsense and it’s called Theater of the Absurd.

After last week’s Federal Open Market Committee (FOMC) meeting, Fed Chair Janet Yellen spent an hour talking nonsense and it was called a press conference. But, really, it could be argued that the Fed is at least as absurd as anything in Waiting for Godot. Much of the dialogue in Godot could, in fact, have come from the FOMC.  For example …

Vladimir: “I don’t understand.”

Estragon: “Use your intelligence, can’t you?”

Vladimir uses his intelligence.

Vladimir: (finally) “I remain in the dark.”

Janet Yellen: “Although the unemployment rate has declined, job gains have diminished.”talawa waiting godot

Estragon: “I can’t go on like this.”

Vladimir: “That’s what you think.”

The FOMC has continued ZIRP (zero interest rate policy) for 90 months. Estragon and Valdimir waited for Godot for only a couple of days.  (more…)

The Job Creation Snow Job

Monday, June 6th, 2016

Consider this headline from the U.S. Bureau of Labor Statistics: Unemployment rate declines to 4.7% in May; payroll employment changes little (+38,000).

Great news, right? The unemployment rate fell to just 4.7% in May, the lowest it’s been since before the financial crisis began.

But take a closer look.

The consensus was that the U.S. economy would create 160,000 jobs in May. That’s a pretty modest number—but not nearly as modest as the actual number. It turns out that the experts were off by about 420%. The U.S. economy created a meager 38,000 jobs in May.Employment

And, by the way, the BLS also announced that the economy created 59,000 fewer jobs in March and April than previously estimated. In other words, the BLS reported a net loss of 21,000 jobs. (more…)

Inflation: The Fed’s Red Herring

Monday, May 23rd, 2016

If you wanted to boost economic growth, which of the following would you focus on?

  • U.S. corporate taxes, which are the world’s highest and are driving businesses to relocate abroad
  • A regulatory environment in which new regulations are being issued at a record pace; for 2015, the Federal Register contained a record 81,611 pages of new regulations
  • Record government debt, which now exceeds $19 trillion
  • Falling household income, with wages down an average of 5.9% since 2007
  • Corporate profits, which fell 5.1% in 2015
  • Low productivity growth, with the average growth rate less than a third of what it was during the previous period of 1995 to 2010
  • The fact that, for the first time ever, more companies are failing in the U.S. than are launching
  • The fact that, with a dearth of initial public offerings, there are half as many public companies as there were in the 1990s
  • Low inflation

    Regulations have been the one growth industry during the Obama Administration. Above is a copy of new federal regulations for 2015. 

    Regulations have been the one growth industry during the Obama Administration. Above is a copy of new federal regulations for 2015. 

If you picked low inflation, congratulations. There is a place for you on the Federal Reserve Board.

The Fed’s focus on inflation is a result of its mandate to reduce or stabilize the unemployment rate and the rate of inflation. But its seeming obsession with a 2% rate of inflation is nonsensical. As we’ve pointed out, 2% appears to be an arbitrary number. Will the economy function better if the inflation rate is 2% instead of 2.5%? Why not 1.5%? (more…)

Upending the World

Monday, April 25th, 2016

Logic has taken a 180-degree turn, running at full sprint in the opposite direction from where it should be.

As one small example, consider the good fortune of Hans Peter Christensen, recently profiled in The Wall Street Journal, who is currently being paid by his bank to borrow money.  Christensen owns a home in Aalborg, Denmark, where negative interest rates resulted in his bank paying him the equivalent of $38 in interest for the quarter for borrowing money.

Meanwhile, in other countries with negative interest rates, some banks are charging customers for their deposits.  So the bank pays you to take its money and charges you to take your money. Zero Rates

Such is the logic of today’s central bankers in much of Europe and Japan, where rates have been negative for more than a year.

The United States has not adopted negative interest rates—but Fed Chair Janet Yellen said in February that the Fed is studying the feasibility of doing so, “to give the economy an extra boost,” according to The Wall Street Journal. (more…)

Something’s Rotten …

Monday, April 4th, 2016

“That it should come to this!”

                                  Hamlet, Act I, Scene II

Any student of Shakespeare will recall that Hamlet’s procrastination did not bode well for Denmark.

Centuries later, the Scandinavian country has Tivoli and perhaps the world’s best ice cream, but it’s not exactly a world power.  It may not be Hamlet’s fault–after all, Denmark is even more socialistic than the U.S. and Canada–but his hesitation was not a good thing for him or his country.YellenHamlet 2

So what does this have to do with Janet Yellen?  She chairs the Federal Reserve Board, which, like Denmark, has wielded its power clumsily, although it doesn’t even produce ice cream.  And, like the tragic prince, she will likely be remembered more for her inaction than for her action.

Even Hamlet didn’t procrastinate for years, although it may seem that way if you watch a poor production of the famous play. Also, like the melancholy Prince of Denmark, Ms. Yellen seems to be collapsing under the weight of the world and fretting over the potential consequences of her actions. And so, like Hamlet, she does nothing.

Her words before the New York Economic Club last week could have come straight out of Hamlet. Princess Yellen may be far less eloquent than the young prince of Denmark, but the parallels between what she said and what he said are significant. (more…)