- Fed’s incompetence still masterfully spun and buried by the usual suspects.
- QE has failed us and has impacted interest rates and the dollar far less than advertised, if at all.
- Market’s crash call still too loud, global conflict update and my long-term gold bet.
Without exception, everyone eagerly awaits every Fed statement and then the pundits, committed to deciphering the hidden meaning, dissect every word and punctuation until the cows come home. Including the words "Press Release" and the date, the last statement was only 885 words in length, but there was no consensus until Janet Yellen mentioned "six months" during the press conference, which turned out to be six months after QE ends. But now they don't know when QE will end. Sadly, the status quo is accepted without a fight, and the music keeps on playing, while these somewhat worthless pieces of prose are portrayed as professional assessments.
The FOMC statements are famous for triggering the hunt for the intent behind the words, often leading to market volatility, the side effect and work product from a group of people with stability tattooed on their foreheads. It's not ambiguity. It's ambivalence in slow motion! Case in point, 6.5% unemployment was the worshipped marker in December of 2012, but now it's not so important for obvious reasons -- or a seismic wave of attraction and repulsion! The question that must be asked, as far as competence is concerned, is whether the Fed has been paying any attention to the labor force participation rate, although Yellen sticks with the demographics fallacy. Competence, you asked? During the press conference, Janet Yellen wasted no time in answering the first question by the Associated Press' reporter, and conveyed that everything the committee has done has been effective. Everything! I was worried.
Now imagine that you have to submit a report to your boss and that the ambiguity, or ambivalence, is so pervasive that it is virtually impossible for anyone to know what you mean. Yes, you may be able to slide by that one time, but we know the end result after that. I was going to look on the bright side, but let's peek at the dark side instead. Ben Bernanke pocketed "at least $250,000 for his first public speaking engagement, in Abu Dhabi," and the fact that he's being paid handsomely for another type of FOMC statement is not what concerns me, because that is how free markets work. If anyone is willing to pay $2,000 to listen to Dr. Seuss reading "The Cat in the Hat," or some other tale, so be it and good for Ben. But the main point here is that these people move on and get nice jobs mostly because of whom they know, not what they know, and, worse yet, they may end up teaching our kids at prestigious universities.
Recently Ben Bernanke conveyed regret that the common folk didn't understand the bailouts, and while many got a free ride when they shouldn't have, I agree that the outcome would have been temporarily worse. But there's this misguided self appointed heroism that will not fade.
He responded with some $3.3 trillion in emergency lending to financial institutions, including aiding the rescue of Bear Stearns Cos. and American International Group Inc.
The intent here is not to target Fed members to fulfill a personal need, but rather to emphasize that all of them continue to hit the speech circuit, portraying themselves as experts while drawing a taxpayer funded salary, when, in fact, they have nothing to offer and to show for. Saved us from a crisis? The genius would be to have done it without using a printing press, otherwise anyone could have pushed the red button. Hey Joe! You're short $100 billion? Stop by later with the family for burgers and drinks, and don't forget to bring the U-Haul to carry the "paper."
After Janet Yellen used the "six month" sinful language, the deployment of damage control procedures by Fed members was immediate, and expected, as the spooked market headed south. Philadelphia Fed President Charles Plosser certainly told the crowd how the Fed is fixated on the stock market, a domain that should be far removed from the Fed's closed door deliberations.
"It's a little bit puzzling that the market would react the way it did," Plosser said on CNBC's "Squawk Box." "I don't think the Fed changed its position. In fact, it tried to say very explicitly in its statement that we believe forward guidance or the expectations have not changed as far as we're concerned."
It was only in January that Plosser said that "the Fed is monitoring asset prices and leverage to avoid 'frothiness' in markets," and now he's worried about a 2% drop. Ambivalence is defined as "simultaneous and contradictory attitudes or feelings." I think that the Fed should meet at the Verizon Center, sell tickets and t-shirts adorned with "Go Fed!" in green, and use the revenue to reduce our national debt to justify their existence.
I watched Janet Yellen's testimony to Congress in February, and she was asked about the Fed's decision and reasoning to buy Treasuries and mortgage backed securities. She politely informed us that they have the same impact. Why buy both, then? Clearly they just do it because it's economically sexy and adds a touch of intrigue. To add a third voice to the discussion, a study found that "top central bank officials missed the oncoming crisis because they failed to make the connection between housing, the banking industry and the economy," which to a layman sounds pretty simple, never mind illustrious minds with nothing else to do but connect the dots. Completely oblivious to the charge, Bernanke pointed to stress tests as the surgical maneuver that solves the problem. But it gets worse, and does not deviate from what I've been saying for a long time, or, as the WSJ article's title indicates, "a narrow mindset."
However, the paper's authors, three sociologists at the University of California, Berkeley, say the problem runs much deeper, and has to with the narrow framework for analysis-grounded in macroeconomics-that dominates Fed discussions.
I stated previously that "if one doesn't know people, one doesn't know markets," and that's the Fed. I was chastised in the past for suggesting that Fed members should have a degree in psychology, not economics, and I guess the chastisers subscribe to the same narrow mindset. Then, and as it has become customary, there's the move to a new monetary tool, an "experimental bond-trading program known as a 'reverse repo' facility," although one can give me plenty of tools -- hammer, saw, level, etc. -- and expect me to be a carpenter, when in fact I don't know how to build a cabinet. In addition, they have gone to great lengths in trying to convince the market dudes like me that tapering QE is not tightening. But, excuse my stupidity, what is the opposite of easing? They're right because the antonym is "constraining." They're not tightening; they're constraining! You "un-academic" peasants just don't get it!
A popular theme has been that QE, the cash-splash as a Brit put it, would devalue the dollar, kick start inflation, and stimulate the economy. The chart above depicts the S&P 500 (NYSEARCA:SPY) as it responded to the presumed future effects of QE. The dollar index is also shown, and one can easily argue that QE actually stabilized the dollar, not devalue it, with the greenback being where it was before QE started.
Furthermore, QE was designed to lower interest rates, and, as the chart above shows, the 10-year Treasury yield dropped about 250 basis points from 2008 to 2012, while the last QE exercise saw rates rise 150 basis points. If that is all a $4 trillion balance sheet can do, and assuming that QE is single handedly responsible for interest rate fluctuations, then we may have to triple it. In short, a swing of 250 basis points that accomplished nothing, economically speaking, inflated the Fed's balance sheet that must be reversed, and drove investors into riskier assets, seeking yield.
Dollar devaluation can be viewed in two major ways, with the first being that the dollar depreciates relative to other currencies for a variety of reasons, overriding absolute QE. In addition, the dollar can devalue domestically and that is felt through inflation. As it stands, neither one has taken place, and as St. Louis Fed President James Bullard put it, "there is no generally accepted explanation for the low inflation readings." Generally, it's about people's behavior, James! As investors piled on equities looking for yield, one minor detail was overlooked because equities have this annoying habit of eventually responding to performance, or profits, and equity yield is not the same as bond or CD yield. Stay tuned, especially regarding QE as the economy weakens, because stopping or reversing the tapering process is an admission of failure, and the quantitative extravaganza fiddle-faddle has the Fed up the river without a paddle. Maybe Fed members can bring these charts to their speeches and explain to their audiences what is happening. I'm all ears.
But not all is lost, and the Fed must be given credit on QE for one major accomplishment, as the study by McKinsey & Company highlighted the real QE winners.
…the biggest impact of quantitative easing by the world's major central banks has been the cost-savings delivered to governments. Since 2007, bond-buying programs in the United States, the UK and the eurozone have reduced costs for governments by a total of $1.6 trillion.
Certainly when the throat soothing medicine runs out, we'll cough up higher taxes as the debt expands, and unwillingly embrace austerity as if it was our first love.
On the market topic, we're ending Q1-2014 virtually flat from Q4-2013 with an uneasy feeling, which is not bad considering the facts. A typical major "bubble" blow-off phase, not to deviate from preferred lingo, may not happen at all, because retail market participants of yesteryear cannot fully participate, and that rate potentially mirrors the labor force participation rate. If the assumption is correct, it would mean that most people that want to be on board already have taken their seats, and the flight is full with standing room only. Yet on the flip side, I still see too many published opinions that the crash is coming, and the short positions that go with it. Considering the unwritten rule that markets have a unique disposition of making all of us look like fools, especially the inflexible long-term crystal ball holders, we have another leg to go.
Another often ignored market scenario is a "fade-to-red," 1970s style, where we take one step forward and two steps back, masking the immediate pain and keeping the hope alive, while never modifying perceptions until we eventually find the octopus' hiding place. It's reminiscent of a long trip down a windy road looking for an elusive landmark, where we promise to make a u-turn after another two miles, and never do, still hoping to find that beautiful oak tree in the shape of a dollar sign until the gas starts to run low.
As President Obama made a detour to Saudi Arabia, a 2,000 mile flight from Rome for a 2-hour meeting that has TV commentators confused, the news late Friday from the White House was that "Russian President Vladimir Putin called U.S. President Barack Obama to discuss a U.S. proposal to end the conflict in Ukraine." Iran and Syria are conspicuously absent from the headlines, and the U.S. intelligence community is not stupid and is looking at every angle. What does Putin have to gain, financially speaking, from invading the Ukraine and the Baltic states? So keep the map above in mind, while the majority of the work being done by the Russians is not on your HDTV. Forget the cold war, because it's not about power through ideology: It's about power through energy! It would be nice to create a political alliance that includes six of the top 10 oil producers -- Russia, Saudi Arabia, Iran, United Arab Emirates, Iraq and Kuwait -- accounting for almost 40% of world output, and with China (4th producer) simply cheering on, while dealing with domestic unrest. Europe will find itself between a gas pump and a hard place.
On the brewing global conflict and instability front, I placed my long-term bet. Did I say long-term? I must be losing it, because after three days I start asking "Are we there yet?" Well, I have become a gold bug (NYSEARCA:GLD) for the time being, and placed 100% of my Roth IRA in the ProShares Ultra Gold ETF (NYSEARCA:UGL) -- leveraged 2x to spice it up. That represents 20% of my assets, net of real estate, and I don't have tax deferred retirements accounts because I don't want the government to share in my spoils later on. Please, Uncle Sam, take the money today and use it wisely. Who am I kidding?
For the record, I don't diversify for the sake of diversification, and if one is diversifying purely as a form of risk management, there's something missing, although I won't be as rude as Mark Cuban, the Dallas Mavericks' owner, when he stated that diversification "is for idiots." Why a gold ETF and not coins and bars? Because I don't anticipate living under a rock with a gun and a can of beans, while getting some yield from option selling. Then again, those proposing to sell me physical gold so I'm insured and protected from cataclysmic events are far too happy to take my cash. Hmm!