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  • Capitalism's End Game

    German Finance Minister, Schaeuble arrives at the Athens airport.

    An immigration officer asks him: "Nationality?" Schaeuble says: "German." The immigration officer asks: "Occupation?" To which Schaeuble responds: "Nein, I am here for a few days only."

    "Gallows humor" is popular during depressions. No one is looking for a belly laugh - just a little smirk to brighten up the never-ending string of despair people usually have to deal with. Films were a popular means of escape in the 1930s and we were very into IMAX when they were below $12.50 during the crash as we expected a similar move up in movies audiences as we moved through this century's Great Recession.

    (click to enlarge)However, it only cost a dime to go to the movies in 1930 and, to put it in perspective, the price of gas was .20 at the time. Now it costs $15 to see an IMAX film and gas is $4 a gallon this weekend and we're beginning to see a bit of blow-back from consumers - who simply can't afford to spend $30 for two tickets when they just spent $60 to fill up the car.

    Gasoline was also persistently high in the 30s (relative to inflation) but came down from a relative $3 per gallon in 1940 to $2 a gallon in the 70s as the US entered an age of prosperity and we built this nation around the idea of having an inexpensive and readily-available fuel source.

    After the initial price shock of the 70s, which pushed us into another recession, things were improving all the way through about 2002, when gasoline prices soared to inflation-adjusted records. While the supply is still plentiful, the prices are no longer affordable and 86M barrels of oil a day at 42 gallons a barrel x 365 days a year at $3.50 per gallon comes out to $4.6Tn a year. Of course, not all oil converts to gasoline but you get the idea. Also, our friends in Europe are reading this and saying "$3.50 a gallon - in your dreams!" as they pay roughly $9 at the pumps.

    (click to enlarge)

    Add in the effect the high price of oil has on food and other downstream products that rely on oil and you are looking at oil alone diverting 5% of our global GDP - in EXCESS of the realistic $70 per barrel price - away from more productive uses than buying a commodity that literally goes up in smoke as soon as we use it (see "Goldman's Global Oil Scam Passes the 50 Madoff Mark" for more details).

    (click to enlarge)This is why Capitalism is the enemy of mankind. Since rising oil prices had and have very little relationship to the cost of extraction - it is fantastically profitable for the oil companies when we have these little price spikes.

    It is also fantastically profitable for the speculators, who insert themselves between the commodity producers (who take the actual risks) and the consumers (who create the actual demand) and the goal of the speculator is, of course, to pay the producers of the commodities as little as possible while charging the consumers as much as possible.

    (click to enlarge)I have warned people for years that these same speculators are now, even as I warn you, circling their wagons and looking to insert themselves between you and your water as well. One day they will go after the air that you breathe but water is already on the table and will one day be as manipulated as gasoline if we don't stop them now.

    This isn't an article about that but I do think it's important to keep you alert for the signs to come as we move into the final phases of corporations controlling everything you need to live. As I was saying, Capitalism is the enemy of mankind because, as we saw in the early 2000s, when oil companies and commodity producers make a lot of money - then the "hot money" flows into them. In real Capitalism, that's a good thing as more people drill wells and plant corn, etc. and, ultimately, drive prices back down to a level that meets the demand curve properly.

    Unfortunately, we don't even have true Capitalism, we have a perversion of it that has spawned a Corporate Kleptocracy where companies are rewarded for monopolizing resources and delivering the lowest quality product for the highest possible price across the board. This is not a long-term benefit to anyone except for those few who end up making all the money. In fact, if you are in the top 10%, it's likely you often choose quality over price and for very good reason - but more and more that choice is denied to the masses and the lifestyle of Americans since the early 70s is very easily summarized as getting less for more - year after year.

    (click to enlarge)

    Corporations are rewarded for shipping our jobs overseas and, as the consumers get poorer and poorer, they are willing to sacrifice things like being able to try on clothes at an actual store or having knowledgeable salespeople answer their questions before they purchase durable goods and the lack of knowledgeable salespeople and closing of actual retail stores (that employed actual people) encourages more and more people to shop on-line, giving Corporations more and more profits and encouraging them to cut more staff and more stores - perpetuating the cycle.

    (click to enlarge)As I said, this is how Capitalism becomes the enemy of mankind: We reward Amazon, who employ 56,200 people, with a price-earnings ratio of 141 while Best Buy, who employs 180,000 people garners a p/e of 6.

    What kind of business do we encourage entrepreneurs to build and invest in? Efficiency is a noble goal and works wonders when you have an ever-expanding market but what happens when you saturate the planet with efficiently-produced goods and services?

    Eventually, perhaps 700M people plus machines will be able to produce and distribute everything that 7Bn people on this planet require. What then? 6.3Bn people won't be just unemployed, they will be unnecessary - except for as consumers. But there's obviously no point in paying them not to work but if it's not profitable to employ them and we're not going to support them but we need them to buy our stuff - what then? If we kill them they can't consume - this is a conundrum that we're already facing, somewhere between the 1/3 of the population that "needs" to work today and the 1/10th that will need to work in the future - we'd BETTER figure this out!

    (click to enlarge)As you can see from the above chart, we certainly don't share the benefits of increased productivity with our workers, do we?

    Out of an 80% increase in Productivity since 1980, less than 7% of those gains showed up as wages - not even enough to keep up with inflation. This is what Capitalism REWARDS, this is what Capitalism steers us to - and it's still not enough - it will never be enough as the hot money chases the companies that make the most by doing the least - day after day, year after year - shaping our economy, our social structure and our Government the way a river shapes a canyon.

    Creating an underclass - even a slave class - is the natural end-game of Capitalism - a Corporate Kleptocracy simply seeks to hurry things along to their inevitable conclusion while making sure the players who are currently on top remain on top. In other words, they won the first round - and now they want to change the rules to make sure there are no surprises for the rest of the game.

    Marx argued that, due to economic inequality, the purchase of labor cannot occur under "free" conditions. Since capitalists control the means of production (e.g., factories, businesses, machinery) and workers control only their labor, the worker is naturally coerced into allowing their labor to be exploited. Labor historian Immanuel Wallerstein has argued that unfree labor - by slaves, indentured servants, prisoners, and other coerced persons - is compatible with capitalist relationships.

    File:Pyramid of Capitalist System.png

    While in major capitalist economies the minimum wage is legislatively imposed by the state, there is no maximum wage limit, which is supposedly determined by the forces of the free market. They further argue that the minimum wage measure does not serve to set a lower limit in a worker's earnings; it actually functions as an upper limit on the earnings of a person that just enters the workforce. The existence of minimum wage, coupled with the absence of maximum, permits rapid wealth accumulation and leads to a phenomenon termed "plutonomy" by Citigroup. In effect, wages are kept low for almost all of the population while the remaining minute percentage is allowed to meet overwhelming profits.

    This IS what's happening folks and it's getting worse and worse every year and it is not going to end well...

    Disclosure: I am short DIA, QQQ, IWM, USO, GLD, PCLN, CMG.

    Additional disclosure: Positions as indicated but subject to change.

    Apr 11 4:59 PM | Link | 35 Comments
  • Happy Holidays! Early Morning Notes

    Good morning!

    Futures up slightly despite Asia down 1%, except Shanghai, who are up a tiny bit but all of it a jam into the close. There's only one story this morning:

    Egan-Jones cuts its credit rating on U.S. government debt to AA from AA+ with a negative watch, citing a lack of progress in cutting the mounting federal debt. "When debt-to-GDP exceeds 100%, a country's financial flexibility becomes increasingly strained," Sean Egan writes. "For the first time since World War II, U.S. debt exceeds 100%."

    Nothing that isn't obvious but it's the proverbial little boy finally pointing his finger and saying: "But the Emperor has no clothes!"

    Europe is closed and we're closed, of course. We do get NFP at 8:30 and Consumer Credit at 3, but the Futures will be closed by then (9:15 as I hear it).

    We're looking for 225-250,000 jobs added but what does that do? It's too much for the Fed to ease and not enough to get us out of trouble this decade as we need 150,000 jobs a month to keep up with population growth and 100,000 above that puts us about 10 years from full employment.

    (click to enlarge)

    Regardless, we had that great graph showing how we're adding the wrong kind of jobs and this graph shows the problem in a nutshell:

    (click to enlarge)

    How can we have a recovery when the US Consumers, the ones the ENTIRE WORLD are now counting on to bring the planet out of recession, aren't even making enough money to keep up with the Fed's BS inflation numbers - let alone the real inflation of over 4%. Where will the money come from for more houses, more cars, more appliances, IPhones, IPads, etc? This is not a magic trick - at some point the consumer has to actually have money to spend!

    And that brings us to Consumer Credit and, surprise, surprise - look what the Consumers are forced to do as wages don't keep up with inflation:

    (click to enlarge)

    Revolving credit (Credit Cards) was actually down $2.9Bn in Jan because PEOPLE HAVE RUN OUT OF MONEY! What was up $20.7Bn was non-revolving credit and that's home loans but mostly auto loans, as the car companies have been boosting sales by giving loans to anyone with a pulse - what can possibly go wrong with that plan?

    That was the largest increase in non-revolving credit since November 2001, just after 9/11, when they dumped rates and goosed liquidity, which gave us a short-term boost until the markets dropped 33% between March 2002 and July.

    Next week we get the BBook, PPI and CPI but the focus will be on earnings and AA is not likely to get us off to a good start so I simply don't see anything in particular to be bullish about at the moment.


    Monday Apr 9Tuesday Apr 10Wednesday Apr 11Thursday Apr 12Friday Apr 13
    International Perspective »

    4-Week Bill Announcement
    11:00 AM ET

    3-Month Bill Auction
    11:30 AM ET

    6-Month Bill Auction
    11:30 AM ET

    NFIB Small Business Optimism Index
    7:30 AM ET

    ICSC-Goldman Store Sales
    7:45 AM ET

    8:55 AM ET

    Wholesale Trade
    10:00 AM ET

    4-Week Bill Auction
    11:30 AM ET

    3-Yr Note Auction
    1:00 PM ET

    MBA Purchase Applications
    7:00 AM ET

    Import and Export Prices
    8:30 AM ET

    EIA Petroleum Status Report
    10:30 AM ET

    10-Yr Note Auction
    1:00 PM ET

    Beige Book
    2:00 PM ET

    Treasury Budget
    2:00 PM ET

    Weekly Bill Settlement

    International Trade
    8:30 AM ET

    Jobless Claims
    8:30 AM ET

    Producer Price Index
    8:30 AM ET

    Bloomberg Consumer Comfort Index
    9:45 AM ET

    EIA Natural Gas Report
    10:30 AM ET

    3-Month Bill Announcement
    11:00 AM ET

    6-Month Bill Announcement
    11:00 AM ET

    5-Yr TIPS Announcement
    11:00 AM ET

    30-Yr Bond Auction
    1:00 PM ET

    Fed Balance Sheet
    4:30 PM ET

    Money Supply
    4:30 PM ET

    Consumer Price Index
    8:30 AM ET

    Consumer Sentiment
    9:55 AM ET

    Apr 06 4:13 AM | Link | Comment!
  • Phil's Notes On Fed Minutes To Members

    FOMC Minutes - 3/13 (Green is good, red is bad, Fed BS is purple):

    Developments in Financial Markets and the Federal Reserve's Balance Sheet
    The Manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on January 24-25, 2012. He also reported on System open market operations, including the ongoing reinvestment into agency-guaranteed mortgage-backed securities (MBS) of principal payments received on SOMA holdings of agency debt and agency-guaranteed MBS as well as the operations related to the maturity extension program authorized at the September 20-21, 2011, FOMC meeting. By unanimous vote, the Committee ratified the Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.

    Staff Review of the Economic Situation
    The information reviewed at the March 13 meeting suggested that economic activity was expanding moderately. Labor market conditions continued to improve and the unemployment rate declined further, although it remained elevated. Overall consumer price inflation was relatively subdued in recent months. More recently, prices of crude oil and gasoline increased substantially. Measures of long-run inflation expectations remained stable.

    Private nonfarm employment rose at an appreciably faster average pace in January and February than in the fourth quarter of last year, and declines in total government employment slowed in recent months. The unemployment rate decreased to 8.3 percent in January and stayed at that level in February. Both the rate of long-duration unemployment and the share of workers employed part time for economic reasons continued to be high. Initial claims for unemployment insurance trended lower over the intermeeting period and were at a level consistent with further moderate job gains.

    Manufacturing production increased considerably in January, and the rate of manufacturing capacity utilization stepped up. Factory output was boosted by a sizable expansion in the production of motor vehicles, but there also were solid and widespread gains in other industries. In February, motor vehicle assemblies remained near the strong pace recorded in January; they were scheduled to edge up, on net, through the second quarter. Broader indicators of manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels suggesting moderate increases in factory production in the coming months.

    Households' real disposable income increased, on balance, in December and January as labor earnings rose solidly. Moreover, households' net worth grew in the fourth quarter of last year and likely was boosted further by gains in equity values thus far this year.Nevertheless, real personal consumption expenditures (PCE) were reported to have been flat in December and January. Although households' purchases of motor vehicles rose briskly,spending for other consumer goods and services was weak. In February, nominal retail sales excluding purchases at motor vehicle and parts outlets increased moderately, while motor vehicle sales continued to climb. Consumer sentiment was little changed in February, and households remained downbeat about both the economic outlook and their own income and finances.

    This is what we've been pointing out all quarter. It's all about the autos and cars do wear out - at a certain point, people HAVE to buy new ones. 3 years with almost no car sales and one year with a rebound is not something we base a bull premise on. Who else is doing well? HD, LOW, SCW… Of course people who don't move eventually have to fix the holes in the roof, etc - that's not a recovery, that's survival.

    Housing market activity improved somewhat in recent months but continued to be restrained by the substantial inventory of foreclosed and distressed properties, tight credit conditions for mortgage loans, and uncertainty about the economic outlook and future home prices. After increasing in December, starts of new single-family homes remained at that higher level in January, likely boosted in part by unseasonably warm weather; in both months, starts ran above permit issuance. Sales of new and existing homes stepped up further in recent months, though they still remained at quite low levels. Home prices were flat, on balance, in December and January.

    Real business expenditures on equipment and software rose at a notably slower pace in the fourth quarter of last year than earlier in the year. Moreover, nominal orders and shipments of nondefense capital goods declined in January. However, a number of forward-looking indicators of firms' equipment spending improved, including some survey measures of business conditions and capital spending plans. Nominal business spending for nonresidential construction firmed, on net, in December and January, but the level of spending was still subdued, in part reflecting high vacancy rates and tight credit conditions for construction loans. Inventories in most industries looked to be reasonably well aligned with sales in recent months, although stocks of motor vehicles continued to be lean.

    Data for federal government spending in January and February indicated that real defense expenditures continued to step down after decreasing significantly in the fourth quarter. Real state and local government purchases looked to be declining at a slower pace than last year, as those governments' payrolls edged up in January and February and their nominal construction spending rose a little in January.

    The U.S. international trade deficit widened in December and January, as imports increased more than exports. The expansion of imports was spread across most categories, with petroleum products and automotive products posting strong gains in January. The rise in exports was supported by shipments of capital goods and automotive products, while exports of consumer goods and industrial supplies declined on average. Data through December indicated that net exports made a moderate negative contribution to the rate of growth in real gross domestic product (NYSE:GDP) in the fourth quarter of last year.

    Overall U.S. consumer prices, as measured by the PCE price index, increased at a modest rate in December and January. Consumer energy prices rose in January after decreasing markedly in December, and survey data indicated that gasoline prices moved up considerably in February and early March. Meanwhile, increases in consumer food prices slowed in recent months.Consumer prices excluding food and energy also rose modestly in December and January. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers were unchanged in February, and longer-term inflation expectations in the survey remained in their recent range.

    Measures of labor compensation generally indicated that nominal wage gains continued to be subdued. Increases in compensation per hour in the nonfarm business sector picked up somewhat over the four quarters of 2011. However, the employment cost index increased at a more modest pace than the compensation per hour measure over the past year, and the 12-month change in average hourly earnings for all employees remained muted in January and February.

    Recent indicators suggested some improvement in foreign economic activity early this year after a significant slowing in the fourth quarter of last year. Aggregate output in the euro area contracted in the fourth quarter, but manufacturing purchasing managers indexes (PMIs) improved in January and February relative to their low fourth-quarter readings, and consumer and business confidence edged up. Floods caused steep production declines in the fourth quarter in Thailand and also had negative effects on output in other countries linked through Thai supply chains. However, economic activity in Thailand recovered sharply around year-end, and manufacturing PMIs moved up across Asia through February. Higher prices for energy and food put upward pressure on headline inflation in foreign economies, but measures of core inflation remained subdued.

    On wages - I consider it bad but the Fed considers it good as the inflation they are paid to fight is WAGE INFLATION - and they do that job VERY WELL! PMI's (same as my issue yesterday) are only up compared to TERRIBLE Q4 numbers (when the markets gained 20% anyway).

    Staff Review of the Financial Situation
    On balance, U.S. financial conditions became somewhat more supportive of growth over the intermeeting period, and strains in global financial markets eased, as domestic and foreign economic data were generally better than market participants had expected and investorsappeared to see diminished downside risks associated with the situation in Europe.

    Wouldn't you fire someone who gave you a BS report like this?

    Measures of the expected path for the federal funds rate derived from overnight index swap (NYSE:OIS) rates suggested that the near-term portion of the expected policy rate path was about unchanged, on balance, since the January FOMC meeting, but the path beyond the middle of 2014 shifted down a bit, reportedly reflecting in part the change in the forward rate guidance in the Committee's January statement. On balance, yields on Treasury securities were little changed over the intermeeting period. Indicators of inflation compensation over the next five years edged up, while changes in measures of longer-term inflation compensation were mixed.

    Broad U.S. equity price indexes rose significantly over the intermeeting period; equity prices of large banking organizations increased about in line with the broader market. Aggregate earnings per share for firms in the Standard & Poor's 500 index declined in the fourth quarter, but profit margins for large corporations remained wide by historical standards. Reflecting a narrowing of spreads over yields on comparable-maturity Treasury securities, yields on investment- and speculative-grade corporate bonds continued to decline over the period, moving toward the low end of their historical ranges. Prices in the secondary market for syndicated leveraged loans moved up further, supported by continued strong demand from institutional investors. The spreads of yields on A2/P2-rated unsecured commercial paper issued by nonfinancial firms over yields on A1/P1-rated issues narrowed slightly on balance.

    Bond issuance by financial firms was strong in January and February, likely reflecting in part the refinancing of maturing debt that had been issued during the financial crisis under the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program. The issuance of bonds by domestic nonfinancial firms was solid in recent months, and indicators of credit quality remained firm. Growth of commercial and industrial (C&I) loans continued to be substantial and was widespread across domestic banks, though holdings of such loans at U.S. branches and agencies of European banks decreased further. Financing conditions in the commercial real estate sector continued to be tight, and issuance of commercial mortgage-backed securities remained low in the fourth quarter of last year. Gross public equity issuance by nonfinancial firms was still solid in January and February, boosted by continued strength in initial public offerings. Share repurchases and cash-financed mergers by nonfinancial firms maintained their strength in the fourth quarter, leading to a sharp decline in net equity issuance.

    That's interesting as they are basically saying that lack of new issues and massive buybacks (using Free Money from the Fed) of stock have decreased the amount of shares outstanding and so, more dollars chase less stock and drive the prices up (and make EPS seem better than it really is). This is a game that can't be played forever - just another bubble on top of all the other bubbles waiting for the big pop.

    Although mortgage rates remained near their historical lows, conditions in residential mortgage markets generally remained depressed. Consumer credit rose in recent months, with the growth in nonrevolving credit led by continued rapid expansion of government-originated student loans. Issuance of consumer credit asset-backed securities remained at moderate levels in the fourth quarter of 2011 and in early 2012.

    Gross long-term issuance of municipal bonds was subdued in the first two months of this year. Meanwhile, spreads on credit default swaps for debt issued by states were roughly flat over the intermeeting period.

    Bank credit rose at a modest pace, on average, in January and February, mainly reflecting strong increases in securities holdings and C&I loans. Commercial real estate loans held by banks continued to decline, while noncore loans--a category that includes lending to nonbank financial institutions--grew at a slower pace than in previous months. The aggregate credit quality of loans on banks' books continued to improve across most asset classes in the fourth quarter.

    M2 advanced at a rapid pace in January, apparently reflecting year-end effects, but its growth slowed in February. The rise in M2 was mainly attributable to continued strength in liquid deposits,reflecting investors' preferences for safe and liquid assets as well as very low yields on short-term instruments outside M2. Currency expanded robustly, and the monetary base also grew significantly over January and February.

    More money chasing less stocks - there's your rally.

    Foreign equity markets ended the period higher, particularly in Japan, and benchmark sovereign bond yields declined. Spreads of yields on euro-area peripheral sovereign debt over those on German bunds generally continued to narrow, and foreign corporate credit spreads also declined further. The staff's broad nominal index of the foreign exchange value of the dollar moved down modestly over the intermeeting period.

    Funding conditions for euro-area banks eased over the period, as the European Central Bank (ECB) conducted its second three-year refinancing operation and widened the pool of eligible collateral for refinancing operations. Spreads of three-month euro LIBOR over the OIS rate narrowed, on balance, and European banks' issuance of unsecured senior debt and covered bonds increased. Dollar funding pressures continued to diminish, and the implied cost of dollar funding through the foreign exchange swap market fell moderately further. Reflecting the improved conditions in funding markets, demand for dollars at ECB lending operations declined and the outstanding amounts drawn under the Federal Reserve's dollar liquidity swap lines with other foreign central banks remained small. Several other central banks in advanced and emerging market economies eased policy further. In particular, the Bank of England increased the size of its existing gilt purchase program in February, and the Bank of Japan scaled up its Asset Purchase Program. The Bank of Japan also introduced a 1 percent inflation goal.

    Staff Economic Outlook
    In the economic projection prepared for the March FOMC meeting, the staff revised up its near-term forecast for real GDP growth a little. Although the recent data on aggregate spending were, on balance, about in line with the staff's expectations at the time of the previous forecast,indicators of labor market conditions and production improved somewhat more than the staff had anticipated. In addition, the decline in the unemployment rate over the past year was larger than what seemed consistent with the modest reported rate of real GDP growth. Against this backdrop, the staff reduced its estimate of the level of potential output, yielding a measure of the current output gap that was a little narrower and better aligned with the staff's estimate of labor market slack. In its March forecast, the staff's projection for real GDP growth over the medium term was somewhat higher than the one presented in January, mostly reflecting an improved outlook for economic activity abroad, a lower foreign exchange value for the dollar, and a higher projected path of equity prices. Nevertheless, the staff continued to forecast that real GDP growth would pick up only gradually in 2012 and 2013, supported by accommodative monetary policy, easing credit conditions, and improvements in consumer and business sentiment. The wide margin of slack in product and labor markets was expected to decrease gradually over the projection period, but the unemployment rate was expected to remain elevated at the end of 2013.

    The staff also revised up its forecast for inflation a bit compared with the projection prepared for the January FOMC meeting, reflecting recent data indicating higher paths for the prices of oil, other commodities, and imports, along with a somewhat narrower margin of economic slack in the March forecast. However, with energy prices expected to level out in the second half of this year, substantial resource slack persisting over the forecast period, and stable long-run inflation expectations, the staff continued to project that inflation would be subdued in 2012 and 2013.

    WOW!!! Look how many maybes have to come true for this not to be a friggin' disaster. Oh wait, sorry - it is a friggin' disaster but if A & B and C all work without D & E happening - THEN MAYBE things will not suck in 2013. On this basis we're at S&P 1,400? Is this a joke???

    Participants' Views on Current Conditions and the Economic Outlook
    In their discussion of the economic situation and outlook, meeting participants agreed that the information received since the Committee's previous meeting, while mixed, had been positive, on balance, and suggested that the economy had been expanding moderately. Labor market conditions had improved further: Payroll employment had continued to expand, and the unemployment rate had declined notably in recent months. Still, unemployment remained elevated. Household spending and business fixed investment had continued to advance.Despite signs of improvement or stabilization in some local housing markets, most participants agreed that the housing sector remained depressed. Inflation had been subduedin recent months, although prices of crude oil and gasoline had increased of late. Longer-term inflation expectations had remained stable, and most meeting participants saw little evidence of cost pressures.

    With respect to the economic outlook, participants generally saw the intermeeting news as suggesting that economic growth over coming quarters would continue to be moderate and that the unemployment rate would decline gradually toward levels that the Committee judges to be consistent with its dual mandate. While a few participants indicated that their expectations for real GDP growth for 2012 had risen somewhat, most participants did not interpret the recent economic and financial information as pointing to a material revision to the outlook for 2013 and 2014. Financial conditions had improved notably since the January meeting: Equity prices were higher and risk spreads had declined. Nonetheless, a number of factors continued to be seen as likely to restrain the pace of economic expansion; these included slower growth in some foreign economies, prospective fiscal tightening in the United States, the weak housing market, further household deleveraging, and high levels of uncertainty among households and businesses. Participants continued to expect most of the factors restraining economic expansion to ease over time and so anticipated that the recovery would gradually gain strength. In addition, participants noted that recent policy actions in the euro area had helped reduce financial stresses and lower downside risks in the short term; however,increased volatility in financial markets remained a possibility if measures to address the longer-term fiscal and banking issues in the euro area were not put in place in a timely fashion. Inflation had been subdued of late, although the recent increase in crude oil and gasoline prices would push up inflation temporarily. With unemployment expected to remain elevated, and with longer-term inflation expectations stable, most participants expected that inflation subsequently would run at or below the 2 percent rate that the Committee judges most consistent with its statutory mandate over the longer run.

    So the inflation is not a problem because it's offset by LOW WAGES. Doesn't that make you feel better about the Fed's view of their own mandate?

    In discussing the household sector, meeting participants generally commented that consumer spending had increased moderately of late. While a few participants suggested that recent improvements in labor market conditions and the easing in financial conditions could help lay the groundwork for a strengthening in the pace of household spending, several other participants pointed to factors that would likely restrain consumption: Growth in real disposable income was still sluggish, and consumer sentiment, despite some improvement since last summer, remained weak. A number of participants viewed the recent run-up in petroleum prices as likely to limit gains in consumer spending on non-energy items for a time; a couple of participants noted, however, that the unseasonably warm weather and the declining price of natural gas had helped cushion the effect of higher oil and gasoline prices on consumers' overall energy bills. Most participants agreed that, while recent housing-sector data had shownsome tentative indications of upward movement, the level of activity in that sector remained depressed and was likely to recover only slowly over time. One participant, while agreeing that the housing market had not yet turned the corner, was more optimistic about the potentialfor a stronger recovery in the market in light of signs of reduced inventory overhang and stronger demand in some regions.

    Reports from business contacts indicated that activity in the manufacturing, energy, and agriculture sectors continued to advance in recent months. In the retail sector, sales of new autos had strengthened, but reports from other retailers were mixed. A number of businesses had indicated that they were seeing some improvement in demand and that they had become somewhat more optimistic of late, with some reporting that they were adding to capacity. But most firms reportedly remained fairly cautious--particularly on hiring decisions--and continued to be uncertain about the strength of the recovery.

    Participants touched on the outlook for fiscal policy and the export sector. Assessments of the outlook for government revenues and expenditures were mixed. State and local government spending had recently shown modest growth, following a lengthy period of contraction, and declines in public-sector employment appeared to have abated of late. However, it was noted thatif agreement was not reached on a longer-term plan for the federal budget, an abrupt and sharp fiscal tightening would occur at the start of 2013. A number of participants observed that exports continued to be a positive factor for U.S. growth, while noting risks to the export picture from economic weakness in Europe or a greater-than-expected slowdown in China and emerging Asia.

    Participants generally observed the continued improvement in labor market conditions since the January meeting. A couple of participants stated that the progress suggested by the payroll numbers was also apparent in a broad array of labor market indicators, and others noted survey measures suggesting further solid gains in employment going forward. One participant pointed to inflation readings and a high rate of long-duration unemployment as signs that the current level of output may be much closer to potential than had been thought, and a few others cited a weaker path of potential output as a characteristic of the present expansion. However, a number of participants judged that the labor market currently featured substantial slack. In support of that view, various indicators were cited, including aggregate hours, which during the recession had exhibited a decline that was particularly severe by historical standards and remained well below the series' pre-recession peak; the high number of persons working part time for economic reasons; and low ratios of job openings to unemployment and of employment to population.

    Most participants noted that the incoming information on components of final spending had exhibited less strength than the indicators of employment and production. Some participants expressed the view that the recent increases in payrolls likely reflected, in part, a reversal of the sharp cuts in employment during the recession, a scenario consistent with the weak readings on productivity growth of late. In this view, the recent pace of employment gains might not be sustained if the growth rate of spending did not pick up. Several participants noted that the unseasonably warm weather of recent months added one more element of uncertainty to the interpretation of incoming data, and that this factor might account for a portion of the recent improvement in indicators of employment and housing. In a contrasting view, the improvements registered in labor market indicators could be seen as raising the likelihood that GDP data for the recent period would undergo a significant upward revision.

    Many participants noted that strains in global financial markets had eased somewhat, and that financial conditions were more supportive of economic growth than at the time of the January meeting. Among the evidence cited were higher equity prices and better conditions in corporate credit markets, especially the markets for high-yield bonds and leveraged loans. Banking contacts were reporting steady, though modest, growth in C&I loans. Many meeting participants believed that policy actions in the euro area, notably the Greek debt swap and the ECB's longer-term refinancing operations, had helped to ease strains in financial markets andreduced the downside risks to the U.S. and global economic outlook. Nonetheless, a number of participants noted that a longer-term solution to the banking and fiscal problems in the euro area would require substantial further adjustment in the banking and public sectors. Participants saw the possibility of disruptions in global financial markets as continuing to pose a risk to growth.

    While the recent readings on consumer price inflation had been subdued, participants agreed that inflation in the near term would be pushed up by rising oil and gasoline prices. A few participants noted that the crude oil price increases in the latter half of 2010 and the early part of 2011 had been part of a broad-based rise in commodity prices; in contrast, non-energy commodity prices had been more stable of late, which suggested that the recent upward pressure on oil prices was principally due to geopolitical concerns rather than global economic growth. A couple of participants noted that recent readings on unit labor costs had shown a larger increase than earlier, but other participants pointed to other measures of labor compensation that continued to show modest increases. With longer-run inflation expectations still well anchored, most participants anticipated that after the temporary effect of the rise in oil and gasoline prices had run its course, inflation would be at or below the 2 percent rate that they judge most consistent with the Committee's dual mandate. Indeed, a few participants were concerned that, with the persistence of considerable resource slack, inflation might be below the mandate-consistent rate for some time. Other participants, however, were worried that inflation pressures could increase as the expansion continued; these participants argued that, particularly in light of the recent rise in oil and gasoline prices, maintaining the current highly accommodative stance of monetary policy over the medium run could erode the stability of inflation expectations and risk higher inflation.

    That last part is very anti-QE3. Notice how all the good stuff is generally things that are good for Banks? You have to understand this about the Fed. It is a cartel of BANKERS - they only care if Banks do well. Why do they care about inflation - because they lend money and don't want to be paid back in worthless money. Why do they care about employment - because they lend money and want to be paid back. They like to have wages to attach! That's their whole motivation - they don't give a crap about you or America and their policies are only aimed at improving the situation for their Member Banks - no matter who else is hurt by their policies.

    Committee Policy Action
    Members viewed the information on U.S. economic activity received over the intermeeting period as suggesting that the economy had been expanding moderately and generally agreed that the economic outlook, while a bit stronger overall, was broadly similar to that at the time of their January meeting. Labor market conditions had continued to improve and unemployment had declined in recent months, but almost all members saw the unemployment rate as still elevated relative to levels that they viewed as consistent with the Committee's mandate over the longer run. With the economy facing continuing headwinds, members generally expected a moderate pace of economic growth over coming quarters, with gradual further declines in the unemployment rate. Strains in global financial markets, while having eased since January, continued to pose significant downside risks to economic activity. Recent monthly readings on inflation had been subdued, and longer-term inflation expectations remained stable. Against that backdrop, members generally anticipated that the recent increase in oil and gasoline prices would push up inflation temporarily, but that subsequently inflation would run at or below the rate that the Committee judges most consistent with its mandate.

    In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to maintain the existing highly accommodative stance of monetary policy. In particular, they agreed to keep the target range for the federal funds rate at 0 to 1/4 percent, to continue the program of extending the average maturity of the Federal Reserve's holdings of securities as announced in September, and to retain the existing policies regarding the reinvestment of principal payments from Federal Reserve holdings of securities.

    With respect to the statement to be released following the meeting, members agreed that only relatively small modifications to the first two paragraphs were needed to reflect the incoming economic data, the improvement in financial conditions, and the modest changes to the economic outlook. With the economic outlook over the medium term not greatly changed, almost all members again agreed to indicate that the Committee expects to maintain a highly accommodative stance for monetary policy and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. Several members continued to anticipate, as in January, that the unemployment rate would still be well above their estimates of its longer-term normal level, and inflation would be at or below the Committee's longer-run objective, in late 2014. It was noted thatthe Committee's forward guidance is conditional on economic developments, and members concurred that the date given in the statement would be subject to revision in response to significant changes in the economic outlook. While recent employment data had been encouraging, a number of members perceived a nonnegligible risk that improvements in employment could diminish as the year progressed, as had occurred in 2010 and 2011, and saw this risk as reinforcing the case for leaving the forward guidance unchanged at this meeting. In contrast, one member judged that maintaining the current degree of policy accommodation much beyond this year would likely be inappropriate; that member anticipated that a tightening of monetary policy would be necessary well before the end of 2014 in order to keep inflation close to the Committee's 2 percent objective.

    The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.

    At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:

    "The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."

    The vote encompassed approval of the statement below to be released at 2:15 p.m.:

    "Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable.

    Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

    To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

    The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability."

    Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra Pianalto, Sarah Bloom Raskin, Daniel K. Tarullo, John C. Williams, and Janet L. Yellen.

    Voting against this action: Jeffrey M. Lacker.

    Mr. Lacker dissented because he did not agree that economic conditions were likely to warrant exceptionally low levels of the federal funds rate at least through late 2014. In his view, with inflation close to the Committee's objective of 2 percent, the economy expanding at a moderate pace, and downside risks somewhat diminished, the federal funds rate will most likely need to rise considerably sooner to prevent the emergence of inflationary pressures. Mr. Lacker continues to prefer to provide forward guidance regarding future Committee policy actions through the inclusion of FOMC participants' projections of the federal funds rate in the Summary of Economic Projections (NYSE:SEP).

    Monetary Policy Communications
    As it noted in its statement of principles regarding longer-run goals and monetary policy strategy released in January, the Committee seeks to explain its monetary policy decisions to the public as clearly as possible. With that goal in mind, participants discussed a range of additional steps that the Committee might take to help the public better understand the linkages between the evolving economic outlook and the Federal Reserve's monetary policy decisions, and thus the conditionality in the Committee's forward guidance. The purpose of the discussion was to explore potentially promising approaches for further enhancing FOMC communications; no decisions on this topic were planned for this meeting and none were taken.

    Participants discussed ways in which the Committee might include, in its postmeeting statements, additional qualitative or quantitative information that could convey a sense of how the Committee might adjust policy in response to changes in the economic outlook. Participants also discussed whether modifications to the SEP that the Committee releases four times per year could be helpful in clarifying the linkages between the economic outlook and the Committee's monetary policy decisions. In addition, several participants suggested that it could be helpful to discuss at a future meeting some alternative economic scenarios and the monetary policy responses that might be seen as appropriate under each one, in order to clarify the Committee's likely behavior in different contingencies. Finally, participants observed that the Committee introduced several important enhancements to its policy communications over the past year or so; these included the Chairman's postmeeting press conferences as well as changes to the FOMC statement and the SEP. Against this backdrop, some participants noted that additional experience with the changes implemented to date could be helpful in evaluating potential further enhancements.

    It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 24-25, 2012. The meeting adjourned at 4:10 p.m. on March 13, 2012.

    So nothing shocking here but certainly nothing to rally over either. No help from the Fed means it's all up to earnings now to prove we're going higher. The Dollar has jumped up to 79.60 and didn't do too much damage to the indexes so far but we'll see what happens tomorrow as the rest of the World digests the fact that Europe just eased without us - surely that's going to push the Euro lower (already down to $1.322 with the Pound at $1.59) tomorrow, especially as the BOJ (82.88 Yen) has clearly switched to the Dollar (see my early morning theory).

    Gold took a lovely dive to $1,640 and that's a big winner on the Futures (/YG) - I'll get back to other trades later but clearly a huge disappointment for the bulls.
    Apr 03 5:25 PM | Link | Comment!
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