Thoughts for Friday 09-21-2011
QE3 was a bad medicine when introduced and remains so today in my opinion. The Keynesian motif of “look after the short term, and the long term will take care of itself” reigns supreme. Few are going to get out of this abominable act of government meddling unscathed.
Chairman Dr. Ben Banana and his dovish monkeys, making up the Fed family, have finally printed themselves into a corner. Had Bernanke sobered up and NOT implemented QE3-Infinity the markets would have eventually crashed taking his beloved banking sector with it. Now that he has decided to continue reckless printing and ignoring what many call the 'obvious'; a political ploy the markets will still collapse under its own weight.
Adding to this disaster in the making, various World leaders are playing financial games that effect our own interests adding to the already out of control Fed and US finances. The Saudi’s are playing politics doing everything in its power to send crude to lows just ahead of the presidential election. I wouldn't be surprised to hear the Israelis are going to play politics by trying to effect the US Presidential election outcome by going to war with Iran. It is also thought in some circles Dr. Ben introduced QE∞ in a not so kind guested to Romney. I digress, but The bottom line here is, “We The People” are getting the shaft again.
Politics aside, QE3 will help destroy the US dollar, pressure oil prices upward and allow the EU to continue their wanton speeding habits to have 'free money'. QE3 has all the makings of a large government program about to fail in a spectacular fashion.
Chris Whalen writes, “So long as the Fed refuses to become an advocate for restructuring and merely keeps interest rates low, there will be no progress on the economy or jobs because aggregate credit continues to contract.”
In the next article, below, Mr. Smith says, “Bernanke knows QE3 will fail, but he doesn't really care.” That is a scary thought in believing Ben is protecting the Banking industry, himself and not the US economy or its people.
Smith goes on to say, “His job is to protect the Fed's political power and the banking sector's wealth. He is doing an excellent job at his "real" job while failing catastrophically at his PR job of reviving the real economy and employment.” Smith states categorically, “It's no secret that the Federal Reserve exists for one purpose--to protect the wealth and power of the banks”.
The unleashing of QE3--unlimited money-printing in support of the financial Status Quo-- is proof the Fed has failed, failed, failed. If anything the Fed has done in the past four years had actually had a positive consequence in the real economy, Bernanke would have identified that policy and expanded it in a measured response. Instead he went all-in, emptying the Fed's toolbox in one big dump: unlimited money-printing, unlimited propping of the mortgage market, unlimited support of low Treasury rates and three more years of zero-interest rate policy (ZIRP).
Here is the translation of the Fed Chairman's public comments: whatever. Did you see any of his testimony? It was painfully obvious that either 1) he was sky-high on Ibogaine or 2) he was just going through the motions, duly enunciating PR "cover" that he finds tiresome to repeat and impossible to say with any sincerity or conviction. His body language and delivery said: "You think I believe this canned shuck and jive? Get real, chumps."
Kevin Warsh writes that the Fed is all in having done all they can in holding off a recession. He goes on to say that the Fed can do very little to lower the unemployment rate or suppress the out of control EU finances.
It is all in from the FED, that’s it we have done what we can to hold off a recession. Fed chips are all in. OMG!
Points in Warsh's view.
- QE3 (to infinity) is all in for the FED, this response is equal to the panic of 2008
- Fed is worried by the sluggish US and global recovery, Europe on the dawn of recession, China weakness
- Fed cant do much more to lower unemployment rate
- Fed trying to compensate …
Not everyone gasping for the Fed's liquidity rush. After a failed QE1, then a failed QE2, legendary investor Jim Rogers isn't sure why the Fed wants to announce a QE3 . . . Add into the mix that Europe is also bent on initiating its own version of QE, the Western world has just guaranteed itself "unanimity towards mutual destruction" . . . “You can not remove the ‘recession’ phase from the economic cycle. Playing around with the economic cycle is just wrong.
Mr. Roberts has a nice set of charts depicting why “QE programs do not address the problem aggregate end demand on businesses. In fact, it makes it worse”. He says, “During the Fed's announcement Bernanke repeated several times that the primary concern of the Fed is now employment”. He says, “The [charts] shows the net gains in employment since the beginning of 2009 as compared to the number of individuals that have moved into the "No Longer In Labor Force" category where they are no longer counted”. Finally, “The point here is the manipulating the bond market, and inflating reserves for the major banks, does not create end demand for businesses”
Earlier this year, as the markets were expecting QE3 from one Fed meeting to the next, I was stating another program would not come until September, after data for Q2 GDP could be analyzed. However, as we moved into August and the markets were rallying strongly on "hope" of further balance sheet expansion programs, I moved my QE estimates out until the end of the year. My reasoning, as I stated, was based on the assumption that Bernanke would save his limited ammo for a weaker market/economic environment. Clearly I was wrong.
Housing - Set For A Fall
Bernanke's also stated that by buying mortgage backed bonds he hoped to support the nascent housing recovery. There are two major problems with his thought process that a simplistic look at the data would have revealed. First, and most importantly, is that interest rates have already been at historically low rates and very little housing activity has occurred.
“The Federal Reserve QE3 and zero interest rate policy is the death knell for bank savings, at least until 2015.”
The QE3 hasn't helped and won't help the very folks that Dr. Ben says it will. Nor will it help the unemployed. Petroleum products, grocery’s and anything else that requires oil to get to the market will cost the consumer more. Making the ones struggling to meet ends struggle even more. The problem with deflation is that no one really wins.
If the Federal Reserve’s nightmare comes true and deflation occurs, something else happens that the banks fear and loathe: marginal borrowers default on all their debts.
The Federal Reserve’s policy of protecting the wealth and power of the banks while stealing from wage earners via inflation is a catastrophe for the nation and the 99.9% who are not financiers, politicians and lobbyists.
Subservience is a slippery slope, and if the Fed “caves in” to market demands for a massive QE campaign, then where is the Fed’s vaunted autonomy? It’s gone. So what happens in a few months when the market is once again in danger of rolling over? Will the Fed cave in again . . . If it doesn’t, the market reaction will be violently negative. . .
You see the positive feedback loop of Fed subservience: the longer the Fed puts off regaining autonomy, the more disruptive their refusal to obey the market will be.
. . . what happens to the Fed’s power to manage market behavior . . . and it fails to move the market?
[If the] market spikes up and promptly rolls over into a decline, then his power will be destroyed in three ways:
1. The promise/threat of more QE has been eviscerated; jawboning has lost its power and will only make the Fed chairman look silly and irrelevant.
2. QE itself will be revealed as the victim of diminishing returns: everyone will understand that QE4 will be a failure.
3. The Fed’s omnipotence will be revealed as illusory.
Here is another interesting view that carries some weight now that the Romney Team has signaled that Bernanke won't have a job in 2014. I have also said that Bernanke did NOT want to appear as Obama's lap dog in serving up a dish of QE before the elections, but now he has. But by doing it so near the elections and knowing it isn't going to work leaves me wondering.
Chris Whalen wrote the article, QE3, Deflation And The Fed's Money Illusion which goes on to “illustrate the open-ended purchases of residential mortgage backed securities (RMBS) was more than a little sad”. He points out QE3 will have little impact on the economy or housing as I have said too. Continuing, Chris writes, “since two thirds of the mortgage market cannot be refinanced, the effect of the Fed’s largesse will indeed go straight to the GSEs and Wall Street zombie banks”.
Most importantly he writes, “The third sadness is that people still don’t understand that fraud is the core problem in the market economies. Until you deal with fraud and start to restructure the trillions of dollars in bad assets now choking the US economy, no amount of Fed ease will reverse the contraction in credit. This is not so much a monetary problem as much as a political issue”.
In the following article is another view of Dr. Ben's 'Grand Plan' and again not praising the Fed's band of thieves. Should I dare say it again; The QE3 was a bad idea and a failure to boot.
The Grand Plan, as we have espoused for years, is to force all 'safe' assets to a point where they appear 'rich' to 'risk' assets - and inflate another bubble to take our eyes off the debt being inflated away in the other hand. In the Fed's mind, they tried this before with QE1 and it worked magnificently - lifting stocks phoenix-like from the ashes of a credit-crunch reality. However, this time is different.
The last time the Fed forced MBS CurCpn yields down to 'match' the S&P 500's dividend yield was March 2009 - and investors 'rotated' back to risk (to many people's surprise). Yields were at 4% then and the S&P's P/E multiple was 10x; this time yields are just above 2% and the S&P 500's P/E multiple is a staggering 14.9x.
We suspect that rather than re-enacting the post-March 2009 eruption, valuations this time will force that liquidity to flood into non-equity asset classes (and with HY call-constrained, it leaves little but the energy and precious metals complex to soak up the Fed's exuberance).
It is truly sad that Even Nigeria Gets It in that Quantitative Easing drives oil prices higher and knowing the threat of 'hot money' so why doesn't our distinguished Princeton/MIT/Harvard “edumacated PeeEichDees” get it? Sadly we give our own Politburo 'intelligentisa' at least 3-4 years before they grasp what is now painfully obvious even in the back woods of Africa.
The Fed appears to be 'kicking the can' down the road again and it is not a viable policy for us now as pointed out in the next article. Again, like the author I have VERY LITTLE confidence that this current attempt will boost the unemployment, or anything else except the bankers salary. This QE is just going to fail miserably, just like the past efforts of same and create a serious inflation problem in the future.
Bob Janjuah - "Central Banks Are Attempting The Grossest Misallocation And Mispricing Of Capital In The History Of Mankind"
"The bottom line is simple: The Fed and the ECB are directing and attempting to orchestrate the grossest misallocation and mispricing of capital in the history of mankind.
Their problem is that their actions have enormous unintended and even intended consequences . . . which could create even bigger problems than we currently face . . . these current policy settings are doomed to fail.
The reality here though is that . . . suggesting a short-term benefit from the latest policy actions.
The track record of the last four to five years inspires very little confidence that we will see such great necessary reformist strides taken anytime soon."
There has been much talk about the current administration being socialistic in their approach to the financial via the 'trickle-up' belief. There is now enough proof showing the Fed, in its pursuit of Keynesian financial dreams, will have serious unintended consequences of pushing 'free money' into the system with abandon. Destroying the US dollar is basically what QE3 is doing.
Some Shocking Perspectives On Inflation And Currency Destruction By None Other Than The Federal Reserve
Going back to the FOMC's own archives reveals some truly stunning disclosures arising from none other than the Federal Reserve on the topics of inflation, currency "debauching", money creation, and what it would take for the Communists and Stalin to win.
John Maynard Keynes stated in his 'Economic Consequences of the Peace' (1919): 'Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency...Lenin was certainly right.
There is no subtler, no surer means of overturning the existing basis of Society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.'"
As we continue to examine the aspects of QE3 and then compare to the results of QE1 and QE2 you have stop and wonder why are we doing it again? The definition of insanity is that you keep trying to do the same thing over and over, expecting a different outcome. That definition fits the Keynesian members of the Fed in implementing QE3. I am totally in the financial analyst corner that QE3 will not work, will be a failure like its predecessors and create serious financial consequences that may take years to unravel.
Last week, the Federal Reserve made history when it embarked on unlimited quantitative easing. In other words, it plans to buy bonds and keep interest rates as low as possible for as long as possible until unemployment comes down and the economy starts growing at a healthy clip. However, legendary NYU finance professor Aswath Damodaran isn't convinced this plan will work.
"I am sure that I am missing some significant piece of the puzzle, but as I watch the news coverage and market reaction, I am reminded of one of my favorite movies, 'Groundhog Day,' he writes in a new blog post.
It is becoming clear that QE3-infinity has more political overtones than first believed. I believe that Bernanke introduced QE3 much too early hoping the intended bounce would take it past the November election. The economy is appearing stronger today that it will later this year or mid 2013, so why QE3 now?
One possible reason, according to JJ Abodeely is that “the Fed is engaging in QEn+1 (open ended quantitative easing) because they are trying to keep a dying system alive. The Fed will commit all of its resources and use all of its privilege in this effort because it is the only system they know. Policy makers and the institutions they represent are literally fighting not just for their jobs, but for the survival of their worldview, their lives’ work, and their raison d’être.” Read More here.
Obviously, not a lot of thought was give to Ben's latest proposal of free money is that 'transfer mechanisms' have not been defined. This in itself is a serious issue that can't go unnoticed. Something similar to having a law, but no punishment for breaking that jurisprudence. This is typical of Keynesian attempts in that their 'sincere' efforts are more hope than reality.
Slow mortgage processing could hit QE3. Bankers say QE3 could be limited by delays in processing mortgage applications, with banks reluctant to cut mortgage rates without the staff to process any increase in business. “In the very near term [QE3] has virtually no transfer mechanism whatsoever to the customer,” said one executive at a top lender.
“Originators are massively backlogged in terms of origination volumes.” Yields on mortgage-backed securities fell more than 30 basis points after the Fed's QE announcement, but “very little of that is likely to make it through immediately to consumers."
In conclusion, the Fed has failed miserably over the past several years and the negative effects of deflation will be seen shortly. This endeavor of implementation of QE3-forever will fail to improve the economy or put more people to work. But what it has done is that it will unleashed inflation.
When the economy is not growing, unemployment is high and consumer prices are rising then you have 'stagflation' and that is where we are today. The Fed's answer to this is to print more money. One might conclude that the marginal effects of further monetary stimulus are not unlike the marginal gain one receives from eating a 3rd slice of pie for dessert.
When is this craziness going to stop? It will stop when a 'Black Swan' event of such magnitude occurs to completely upset the financial apple cart. Upsetting in such a way ALL of the politicians can blame the coming hardships of austerity and general public grimness on something else. After all it wasn't their fault, but they are going to fix it – RIGHT?
Chris Whalen writes, “So long as the Fed refuses to become an advocate for restructuring and merely keeps interest rates low, there will be no progress on the economy or jobs because aggregate credit continues to contract”. AMEN
The problem with printing money, writes Chris Martenson, “it's not possible for you, personally, to forever borrow more than you earn without someday getting into financial difficulty, it is not possible for two or ten or 310 million of you to do so. The math does not change simply because a nation is involved instead of an individual.”
While the Fed can wrap this magic act in all sorts of covering language about dual mandates, maximum employment, and price stability, the simple fact remains that money printed out of thin air cannot, has not, and will not ever lead to prosperity. How could it? It arises without any effort at all, no work performed, no goods transformed or lives improved, no land planted and tended well, no services rendered, and no capital formed. It is just conjured into existence. (Read his article here)
Didn't get enough? More reading for Saturday morning:
Who's Afraid Of The Big, Bad QE? M2 Growth, Inflation And P/E Ratios by Bard Luippold
QE3 Can Likely Produce 10% Short-Term Gain by David Brown
QE3 Effects On U.S. Industrial Production by Julie Y
QE3: Bernanke And The Last Crusade by Andrea Bernasconi
QE3: What To Expect When You're Expecting by Kyle Spencer
Quantitative Easing 3 Should Work by Angelo Airaghi
QE3: The Good, The Bad And How To Profit From It by Paul Nathan
What Does QE3 Mean For The Gold Price? by Katchum
QE3: The Third Time's A Charm by Rahul Garga
QE 3: Winners And Losers by Seth Walters
QE3 To Start New U.S. Dollar Carry Trade by Elite E Services
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Written by Gary