The Fed Confronts Itself
Guest Post by Azizonomics.
From Matt Taibbi:
Wall Street is buzzing about the annual report just put out by the Dallas Federal Reserve. In the paper, Harvey Rosenblum, the head of the Dallas Fed’s research department, bluntly calls for the breakup of Too-Big-To-Fail banks like Bank of America, Chase, and Citigroup.
The government’s bottomless sponsorship of these TBTF institutions, Rosenblum writes, has created a “residue of distrust for government, the banking system, the Fed and capitalism itself.”
I don’t know whether to laugh or cry.
First, this managerialism is nothing new for the Fed. The (ahem) ”libertarian” Alan Greenspan once said: “If they’re too big to fail, they’re too big.”
Second, the Fed already had a number of fantastic opportunities to “break up” so-called TBTF institutions: right at the time when it was signing off on the $29 trillion of bailouts it has administered since 2008. If the political will existed at the Fed to forcibly end the phenomenon of TBTF, it could (and should) have done it when it had the banks over a barrel.
Third, capitalism (i.e. the market) seems to deal pretty well with the problem of TBTF: it destroys unmanageably large and badly run companies. Decisions have consequences; buying a truckload of derivatives from a soon-to-be-bust counter-party will destroy your balance sheet and render you illiquid. Who seems to blame? The Fed; for bailing out a load of shitty companies and a shitty system . Without the Fed’s misguided actions the problem of TBTF would be long gone. After a painful systemic breakdown, we could have created a new system without any of these residual overhanging problems. We wouldn’t be “taxing savers to pay for the recapitalization of banks whose dire problems led to the calamity.” There wouldn’t be “a two-tiered regulatory environment where the misdeeds of TBTF banks are routinely ignored and unpunished and a lower tier where small regional banks are increasingly forced to swim upstream against the law’s sheer length, breadth and complexity, leading to a “massive increase in compliance burdens.”
You have been “QE/LTROed”
You have probably seen many versions of this chart, but this one is probably the best self explanatory chart of the QE/LTRO dilemma.
Chart Scott Barber.
Gold and Silver Charts
Gold is flirting with the positive trend line going way back. With the QE 3 gone (until the market corrects 20%), the crowded long gold trade will continue to suffer. Silver is within the “expected” range, and is trading towards the big figure 30. The sell off in Gold and Silver will force people to start selling out stocks due to margin calls.
What if Gold fell 10% from here?
Charts below.
The Fed’s Con Appears To Be Working But The Curtain Is Rising On The Third Act
Guest post by Wall Street Examiner.
In today’s conomic news, the mainstream media focused on the disappointment surrounding the FOMC Minutes, the massaged and sanitized fairy tale about what the participants said at last month’s FOMC confab. The market was shocked! SHOCKED! that most of the members saw no need for additional QE, unless things got worse. I had concluded that a couple of months ago based on the fact that every time QE speculation arose, not only did stocks rally, but so did energy and other commodity prices. The commodity vigilantes, I thought, would tie the Fed’s hands. That and the fact that the conomic data was coming in relatively perky, at least in terms of the headline data, made it highly unlikely that the Fed would do any more money printing.
But here’s the thing. The minutes are fake. They are fabricated, false, phony, ginned up and sterilized garbage, designed for public consumption. To put it bluntly, they’re propaganda. They are what the Fed and the Wall Street casino owners want you to think. They are a blatant attempt to manipulate the behavior of market participants through the use of clever turns of phrase. The Fed wants the market to go higher, but it doesn’t want commodities to go with it, so its story line is that the conomy is healthy enough to continue growing without more QE. That gives traders reason to continue buying stocks, and no reason to buy commodities, which everyone “knows” go up when the Fed prints, in spite of Bernanke’s denials that he’s doing that. And besides, even if he was, commodities are up for other reasons, not anything Ben did, according to Ben.
Later has arrived as this time is NOT different
How quickly people forget. Well, the Euromezz is still here and alive. Focus has shifted from Greece to Spain and Italy, just as The Trader has been suggesting over the past months. With the huge problems Spain faces, don’t be surprised if this “thing” starts spreading to Germany. Meanwhile, a review of the Euromezz from last year, courtesy Omid Malekan. Video below.
The fallacy of the great Bull
As investors finally seem to be realizing the reality, let’s review the bull argument. The Trader has been arguing that the perceived bull is larger than the actual bull. By that we mean, majority of indices have not performed as well as one might read in the main stream media. In Europe the DAX has performed relatively well this year, but there are many other indices actually trading in negative territory. But not the broader indices, or?
No the Eurostoxx 50 is still up on the year, but diminishing. The point is, if you didn’t catch the first couple of weeks in Januaey, you are down on many indices, especially the Spanish Ibex, but also the Eurostoxx 50 and the Italian MIB. Once again, the real bull is not as strong as one might believe.
Chart below.
German Industrial orders and GDP
Presented without comment.
Courtesy Scott Barber of Reuters.
Not so bullish now? The short term prospects for Spain inside the euro
From one of the best think tanks of Europe on the Spanish Economy. OpenEurope has been spot on with regards to the developments regarding the collpasing Spanish economy. From OpenEurope,
Policy Failure and the Great Recession -Too Low for too long
We all know Taylor (the man behind the Taylor rule you read at Econ 101) is suggesting rates should be higher. Meanwhile Bernanke & Co are engaged in the experiment of avoiding the Great Depression by keeping rates artificially low, spurring the stock market and getting people to increase consumption by increasing the inflation expectations. All this while they slowly while debasing the USD. This is clever as you can see the inflation as a form of tax the average Joe doesn’t understand. The question going forward is whether the Fed is simply involved in a big experiment, and people are happy not asking any questions, as Bernanke is the great scholar of the Great Depression. What if he is getting too personal and doesn’t acknowledge they actually might be going the wrong path. Some thoughts on the dilemma by John Taylor.
The debate about the causes of the financial crisis and the great recession will continue for many years, and the facts and analysis that Robert Hetzel put forth in his new book The Great Recession: Market Failure or Policy Failure? should now be part of that debate. As I said in my comments for Cambridge University Press, “Hetzel applies his experience as a central banker and his expertise as a monetary economist to make a compelling case for rules rather than discretion, showing that ‘monetary disorder’ rather than a fundamental ‘market disorder’ is the cause of poor macroeconomic performance. At the same time, he acknowledges and discusses disagreements among those who argue for rules rather than discretion.”
One area of disagreement among those who agree that deviations from sensible policy rules were a cause of the deep crisis is how much emphasis to place on the “too low for too long” period around 2003-2005—which, as I wrote inGetting Off Track, helped create an excessive boom, higher inflation, a risk-taking search for yield, and the ultimate bust—compared with the “too tight” period when interest rates got too high in 2007 and 2008 and thereby worsened the decline in GDP growth and the recession.
Overvaluation Increases
Guest post by Doug Short.
Here is a summary of the four market valuation indicators I updated at the beginning of the month.
| ● The Crestmont Research P/E Ratio (more)
● The cyclical P/E ratio using the trailing ● The Q Ratio, which is the total price of the ● The relationship of the S&P Composite to |
To facilitate comparisons, I’ve adjusted the two P/E ratios and Q Ratio to their arithmetic means and the inflation-adjusted S&P Composite to its exponential regression. Thus the percentages on the vertical axis show the over/undervaluation as a percent above mean value, which I’m using as a surrogate for fair value. Based on the latest S&P 500 monthly data, the market is overvalued somewhere in the range of 34% to 50%, depending on the indicator. This is an increase from the previous month’s 33% to 46% range.
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