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Gary and Chris join us one more time today to recap what Yellen said at her press conference and the FOMC statement.
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I listened to the Q & A session with Yellen and it appeared to me that she was saying that if anything looks bad we will find a excuse to pump again, but for right now steady as she goes we will taper QE slowly. No obfuscation.
You know the real purpose of the Fed is to provide as much money as the US Government needs, and since the US Government simply cannot afford to pay higher interest rates on Treasuries, interest rates will not rise until they can afford to pay…..guestimate: NEVER again. Or until after the dollar collapse in 10 or more years. In the meantime the Fed will print as necessary and buy increasing amounts of US debt until the world gets fed up with depreciating dollars. That will not happen soon.
They abandoned the focus on the unemployment rate because the metric was proven bogus.
The 6.5% target was pulled out of thin air, to begin with. As if to say, “By the time the unemployment rate gets to 6.5%, surely the economy will have gained traction.”
What they forgot is that the yardstick was broken — we don’t calculate the unemployment rate in an accurate manner. Thus, a 6.5% rate was no guarantee that the economy would look ok on main street.
Now that we are closing in on that number, its time to abandon it. But amazingly, no one calls them on it. “Excuse me, Dr. Yellen — isn’t this confirmation that you are conducting a grand science experiment and have no clue as to what would finally propel the economy forward?”
Now, today, she adds (unintentionally, as Chris indicates) an another layer of fiction to the narrative… we might raise interest rates about 6 months after the taper concludes.
Chris is spot on. The interest rates, at the short end, will not get increased by the Fed. They have painted themselves into the corner.
Here’s the question that gets asked if Eric is at the press conference: “Dr. Yellen… so as the Fed removes support from the mortgage and treasury market, exactly who is supposed to be the buyer of last resort? And as interest rates begin to move up, what do you suppose the effect will be on the housing market, auto and consumer loans, business expense, and interest expense on the national debt?”
The apologists for the Fed tell me, “Don’t worry, they are removing the stimulus slowly.” My response is this: if you first blow up a balloon and then release the air — does it matter whether you release the air slowly or all at once? Will that influence the ultimate shape of the balloon?
To think that the stimulus, in all its forms, had a direct positive impact on the mortgage and treasury market but that an exist will not have an equal and opposite effect is insane.
Interest rates are going to go up, all right. But not because the Fed voluntarily increases them at the short end of the curve. They are going to move up at the long end of the curve, because of the repudiation of debt and the dollar.
The last item I want to contribute tonight…
the press conference and the market reaction proves that we are still working off the narrative that the taper is being conducted in an environment of an improving economy. No market is currently priced in a way that allows for this narrative to be discredited.
When it is clear that the economy is rolling over and that new and massive forms of stimulus are on the way — hello Gold.
Great analogy with the balloon.
CFS…….your guesstimate is a good one……like NEVER………..
I understand you will be speaking in Texas soon. True?
It took only 4 minutes for Yellen to realize she made a mistake in indicating interest rates might rise late in 2015:
I think too many people seem to think that QE was meant to rescue the economy. That was never the intention. QE was meant to inflate asset prices and the hope was that it would trigger a wealth effect that would increase spending and that would mend the economy.
QE has done it’s job and done it amazingly well. It has inflated stocks, bonds and real estate. Contrary to what some would like to believe QE isn’t losing it’s effectiveness, it’s going ballistic. Stock prices have gone almost straight up for the last 2 1/2 years.
This is exactly what the Fed wants. What they don’t want is for that liquidity to switch and go into the commodity markets were it just becomes bad inflation instead of good inflation.
I think this year we will see the rise of bad inflation and the waning of good inflation.
I agree with you that their intention was to trigger the wealth effect (which in turn was thought to promote lending/spending and economic growth).
However, I don’t think QE has been successful in that mission. While it has obviously propelled stock prices, it hasn’t had the follow-on effect.
John Hussman has written about this — pointing to studies which indicate that no wealth effect is derived unless the consumer/spender believes that they have experienced a ‘permanent’ increase to their wealth.
Especially in light of the two crashes we have experienced in the past 14 years, gains in the stock market are looked upon as transitory (rather than permanent). For this reason, it has not resulted in the follow-on behavior the Fed was hoping for.
Once again, a faulty premise guiding their policy.
Meantime, as you indicate, the unintended downstream consequences of their policy are yet to be felt and not even on the market’s radar.
Sounds about right Gary. That is an interesting way to put it. I think that the bad inflation is being promoted though as a starting point. It is what will begin to pressure wage demands so it is not being suppressed. No question the public is going to get squeezed. I recall the 70’s well and it was brutal. No internet then though so we all just suffered through it without the popular online dialogue and caught the data from newsreels and the papers. Most of us had no idea what was happening. Books on the economy, real estate, gold and inflation were selling like hotcakes. You really could make a million as an author back then. But the point is that the public was quite ignorant of the causes. Only the investor class were apprised of the details and even they struggled with what was happening. Today it is amazing how much better people are informed.
as an after-thought, there has also been data to suggest that it is taking increasing amounts of debt to create a marginal dollar of growth. From that standpoint, as well, I think they are coming to the conclusion that they are no longer yielding the desired result.
And it is much worse in China where the ratio is now 4 to 1 where bang for the buck is concerned. If real estate does crash there it will cause quite a bit of gold selling (not buying as some suggest). So precious metals could suffer if Asia has a hard landing…..it is a deflation shock we need to be worried about emenating from Asia.
And here is the first piece of evidence that what I refer to will only accelarate, Eric. All assets come under pressure when credit bubbles break. That includes gold. In fact, gold will be the first to go so expect prices to be pressured down. Gold is not special when you are trying to raise cash. It is only the Western centric investment theme that thinks precious metals will surge as an economy as big as China’s is in decline. The gold bugs are typically blinded to all loginc in such cases…..but then they are notoriously an emotion driven bunch that are always short of anlaytical skills.
Chinese Liquidation of Property — Zero Hedge
And here is the second piece of information that should be setting off a few alarm bells. Gold is not guaranteed in such a setting. Let me quote directly from the article that I post here because it indicates industrial commodities and metals could come under increasing pressure:
“An unwind of Chinese commodity financing deals would likely result in an increase in availability of physical inventory (physical selling), and an increase in futures buying (buying back the hedge) – thereby resulting in a lower physical price than futures price, as well as resulting in a lower overall price curve.”
In other words, a credit unwind will cause asset prices to fall for select commodities that are currently being used as collateral for the carry trade. Chinese hoarding has been seen in a number of areas including copper, zinc, silver, gold, iron ore and other physical industrial goods. They will all (including gold) come under pressure if cash must be raised and the collateral need to be sold to meet debt payment demands.
The trigger will probably be real estate price declines and problems servicing corporate debt loads due to excess capacity and falling exports from China abroad. We are seeing the classic signs of herd behavior already. The Chinese move as a crowd. What else would we expect? Just as they all herded into overpriced housing they will now move out as a group and the process that drove prices up will reverse.
Same there as it is here. People are not different on the other side of the globe.
The gold camp meanwhile lives in some kind of a fantasy world and is unable to process this information. They will contend that metals must rise based on the fact they are sometime a fear trade even though more often than not gold is just a cash alternative (and not a good one since it is so volatile compared to dollars).
I now think gold is threatened…….
“What Is The Common Theme: Iron Ore, Soybeans, Palm Oil, Rubber, Zinc, Aluminum, Gold, Copper, And Nickel?
In other words…..the big threat to gold is that it could suffer deflation just like everything else. Robert Prechter may turn out to have called this one better than anyone else. He said gold prices would decline sharply in the big downturn that lies ahead. And that is why it is not smart to be too heavily invested in one single asset class. Honestly, Eric, I was a little disappointed to read you are 95% in gold equities. Sounds risky to me. You sound very intelligent when writing but then offer information that makes me think you are a huge gambler without a lick of common sense.
I actually said 10% cash and 90% mining equities (which by the way is up about 50% year to date) — but was referring to my trading account. Not my overall net worth, which is diversified across asset classes.
You accuse people of always attacking you, but in the months that I have been reading the message boards here you have launched many unprovoked attacks and insults against others.
You indicated the other day that you were taking a vacation from the message board. Since that time you have made dozens of posts — most of them self congratulatory. Any hope that we see that vacation from the message board?
Don\t push Eric. I am free to change my mind. You did not address any of the topic by the way. Only the part where I was surprised you would be so heavy on gold equities….followed by the usual ad hominems, accusations and insults that are the hallmark of the gold bug community.
So what happened to Gold, Eric…….manipulation maybe?
Gold has suffered significantly in the FOMC weeks. Good buyng oportunity ?
I don’t think the FOMC played a role. My charts told me gold was going down well before the meetings happened.
In other words, the decline was technical. Strangely the tech guys other than Doc did not pick up on it. Maybe they need to use the daily and weekly charts more because a fixation on short term trendlines is not working. Kind of not seeing the forest for the trees.
Bird……where do you think gold is at Year end?
I like Gary’s “Vacation” idea; I could use one! In any event, I was on board with what Doc was saying last week regarding Silver possibly going down to 19.50. Seems early this morning we’re heading in that direction. Also watching S&P Futures these last few minutes on Yahoo Finance dropping from -1.75 to -6.75, hmmm.
Re. Yellen’s first speech, as Artie Johnson used to say on Laugh-In: “Vedi interesting, but also stupid.”
2011 GAO report: “Federal Reserve System: Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance” p. 131
Citigroup receive more than $2.5 trillion
Morgan Stanley receive more than $2.04 trillion
Merrill Lynch receive more than $1.9 trillion
B of A receive more than $1.3 trillion
Barclays receive more than $868 billion
Bear Stearns receive more than $853 billion
Goldman Sachs receive more than $814 billion
QE will NEVER stop until it all blows up!
ACCORDING TO KWN…………..
The FED.. lost $59billion last year and is levered 71 to 1 , and that equals $3900billion, which is not collectable. EQUALS BANKRUPT……