What will the Fed do this weekend? What if the Jackson Hole is another “promise you nothing” meeting? What if the Bernanke Put expires? From Biderman.
It is a bizarre stock market we live in when the wonder is who is gaming whom regarding the Fed this weekend. The Wall Street Journal’s John Hilsenrath today writes as if it is almost certain that the Fed will announce an easing in Jackson Hole. But maybe the Fed is gaming Hilsenrath’s reputation as the Fed’s unofficial mouthpiece to have him sell some more sizzle. Remember, Hilsenrath first promised a Fed easing in early June, which helped stop and reverse May’s sharp stock market selloff. Yet the Fed actually did nothing at the June meeting. Every few weeks since, seeming to coincide with a stock sell off, Hilsenrath writes another story promising an easing soon.
With volatility at depressed levels, markets at “delicate” levels and thin trading, we would not get over confident here. Here is Biderman’s thoughts on the market here.
Many bullish Wall Street analysts seem to be expecting decent second half earnings and revenue growth for the stock market as whole and that is their justification for current stock prices. I say there is no way earnings per share and revenues will grow in aggregate over the second half of this year. I do not include financial stocks in this accounting. That’s because big bank stocks’ earnings per share are based upon the same myth that the current stock market valuation is based upon, and that is the Bernanke Put. The Bernanke put says the Fed will print enough money to buy existing loans, and then everyone lives happily ever after. (full reading here).
Biderman on growth, the Bernanke put and the markets.
The Bernanke put is keeping stocks priced levitated these days, at least in my opinion. Specifically, the Bernanke put exists because the stock market believes that the Federal Reserve can and will do “something” that saves the day, whatever saving the day is. Ultimately that belief falls into the same category as a superstition, like the evil eye or the tooth fairy. The reality is that the Fed cannot do anything to solve the fundamental flaw at the heart of the US economy.
Guest post by Azizonomics.
Ron Paul’s signature Audit the Fed legislation finally passed the House; on July 25, the House bill was passed 327 to 98. But the chances of a comprehensive audit of monetary policy — including the specifics of the 2008 bailouts — remain distant.
Why? Well, the Fed doesn’t seem to want the sunshine. Critics including the current Fed regime claim that monetary policy transparency would politicise the Fed and compromise its independence, and allow public sentiment to interfere with what they believe should be a process left to experts dispassionately interpreting the economic data. Although the St. Louis Fed makes economic data widely available, monetary policy is determined behind closed doors, and transactions are carried out in secret.
The stock market went up today when Ben Bernanke said what I have been saying, which is that US economic growth is not only weak, but appears to be weakening further. Why do stocks go up when the economy weakens? The answer is the Bernanke Put. Each of the last three times when economic growth was slumping, the Fed eased and stock prices soared. Although Bernanke didn’t say it, investors were betting today that the Fed will take action again. The problem is that the Fed easing is becoming less and less effective. It is the law of diminishing returns.
Guest post by Azizonomics.
Many Keynesians really hate the concept of liquidationism. I’m trying to grasp why.
Paul Krugman wrote:
One discouraging feature of the current economic crisis is the way many economists and economic commentators — apparently ignorant of what went on over the last 75 years or so of macroeconomic debate — have been reinventing old fallacies, imagining that they were coming up with profound insights.
The Bank for International Settlements has decided to throw everything we’ve learned from 80 years of hard thought about macroeconomics out the window, and to embrace full-frontal liquidationism. The BIS is now advocating a position indistinguishable from that of Schumpeter in the 1930s, opposing any monetary expansion because that would leave “the work of depressions undone”.
Andrew Mellon summed up liquidationism as so:
The government must keep its hands off and let the slump liquidate itself. Liquidate labor, liquidate stocks, liquidate the farmes, liquidate real estate. When the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. A panic is not altogether a bad thing. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.
Guest post by Doug Short.
Earlier this week the Wall Street Journal posted the results of its June Survey of economists (xls file). In the past my main interest in these forecasts has been the GDP estimates. But today my attention is fixed on the estimates for 10-year yields. The various Federal Reserve strategies in recent years (ZIRP, QE1, QE2 and Operation Twist) have focused on lowering interest rates, for which the 10-year note yield is an interesting “tell”.
The 53 economists solicited for the latest survey were asked for their estimates for 10-year yields at six month intervals from June 2012 to December 2014. Not all of them participated, and responses dwindled a bit for the further out dates. The second chart below captures the ranges of responses for each of the six timeframes. But before we look at that chart, let’s refresh our memory on the recent history of the 10-Year Treasury Constant Maturity Rate, weekly data, through last week’s close.
Is Bernanke losing it? To QE (more) or not to QE, to raise or not to raise are the next questions the Fed must adress, but there is a small problem, Bernanke is slowly losing his friends. That could be a huge issue going forward. Bernanke looks increasingly isolated, and that is not good for stability. More on this via the Atlantic.
Behind every great president stands a great central banker. Ronald Reagan had Paul Volcker. Dwight Eisenhower had William McChesney Martin. And FDR had, well, FDR.
Guest Post via von Mises Institute.
In his lecture at George Washington University on March 20, 2012, Federal Reserve chairman Ben Bernanke said that under a gold standard the authorities’ ability to address economic conditions is significantly curtailed. The Fed chairman holds that the gold standard prevents the central bank from engaging in policies aimed at stabilizing the economy after sudden shocks. This in turn, holds the Fed chairman, could lead to severe economic upheavals. According to Bernanke,
Since the gold standard determines the money supply, there’s not much scope for the central bank to use monetary policy to stabilize the economy.… Because you had a gold standard which tied the money supply to gold, there was no flexibility for the central bank to lower interest rates in recession or raise interest rates in an inflation.
This is precisely why the gold standard is so good: it prevents the authorities from engaging in reckless money pumping of the sort Bernanke has been engaging in since the end of 2007 by pushing over $2 trillion in new money into the banking system.
The Federal Reserve balance sheet jumped from $0.889 trillion in December 2007 to $2.247 trillion in December 2008. The yearly rate of growth of the balance sheet climbed from 2.6 percent in December 2007 to 152.8 percent by December 2008. Additionally the Fed has aggressively lowered the federal-funds rate target from 5.25 percent in August 2007 to almost nil by December 2008.