Let's talk about the January FOMC minutes released last week. Here’s what you need to know about the minutes. They aren’t what the guys and girls at the table actually said. They are what the Committee, or actually Bernanke, seconded by his sycophants, wants you to think they talked about. The minutes are propaganda, pure and simple. They are an attempt to paint the Fed as a wise, deliberative body that knows what it is doing and has your best interest at heart.
But this is really vintage Goebbels. It’s about manipulation, what they want you to think, and how they want you to react as a result of those thoughts. In short, the FOMC meeting minutes are hogwash.
That fact is only revealed when the actual transcripts of the meetings are released once a year, five years after the fact. We only get to see the truth of how devious and clueless the members are after such a long time because the transcripts are embarrassing for the Fed. By the time they are released, the chairman and the members are usually all gone and out of harm’s way. Five or six years (depending on meeting date) is a long time. By then, nobody cares.
Having read a few of these transcripts from times I remember well (like 2004 and 2005), my belief that the Fed chairmen have been both clueless and delusional has been repeatedly confirmed. And yes, they are devious, as many of you have so adamantly pointed out. But they are stupidly devious. Their monumental mistakes are at the root of the mess that we have been in for the past five years.
Here are the minutes of the January 25-26 meeting.
And here’s what they want you to think.
They want you to know that they are concerned about unemployment. They want you to know that they noticed that the “economic recovery is firming.” They want you to think that they noticed the rise in commodity prices, but not to worry, because “measures of underlying inflation remained subdued and longer-run inflation expectations were stable.” In other words, pay no attention to the stuff that’s actually inflating, it’s only the stuff that isn’t inflating and some spurious imaginary constructs that matter. Stay focused on the idea that there’s no inflation and you will see that everything is just fine. As our friends Down Under might put it, “No worries, mate!”
And hey, they noted again that employment levels, while “recovering” (I use quotes because they really aren’t recovering), are really, really low. The FOMC cares. It really, really does.
The Fed noticed that consumers are doing better. Numbers on consumer spending are going up because stocks are going up. Hey, it’s working! Just like Ben said! Of course, only the top 10% are benefitting. They make up a the largest percentage of consumer spending, and if they’re richer, they spend more. So the total goes up. The fact that the other 90%, which doesn’t own much, if any, stock, is still lying half dead in the gutter? The Fed prefers not to call attention to that. Those people don’t matter. They don't move the economic numbers.
As long as total consumer spending is rising, we should all celebrate. Yeah, that's it! The upper echelons are doing fine. The rest of the people just need to get with the program. Learn how to steal with the big boys so you too can profit and spend more.
The Fed did note that consumer sentiment data, which isn’t wealth-weighted like consumer spending is, is still lousy. Tsk tsk. By the way, I’m sad to see Bloomberg buy ABC’s weekly Consumer Comfort Index. This was marvelous free data. Bloomberg will now hide it from public view and serve it only as part of the Bloomberg Professional Service, which only major institutions and mega-billionaires can afford. If any of you have access to that weekly data, please feel free to surreptitiously pass it along to me. I promise to never reveal your identity to the thought police.
The Fed noted that bond yields were firm. It said that was due to the improving economy. It credited itself with keeping yields lower than they otherwise would have been. The minutes didn’t mention the fact that Ben said on the eve of QE2 that bond yields and mortgage rates would fall. He even repeated that mantra to millions of watchers of 60 Minutes a few weeks ago. What happened, boys? Cat got your tongue on this one?
The Fed noticed that banks are not expanding their investments, loans in particular. The members were confused by this, proposing a myriad of excuses. Here's my excuse. The banks are sick and dying, and consequently they are risk-averse. They know that this recovery is built on a house of paper.
The Fed surveys FOMC members and district bank presidents about their expectations for inflation, GDP, and employment at every other Fed meeting. As I have shown in a past article, since 2007 not a single member ever got even the then-current GDP and employment figures correct, let alone the near-term forecast. That tells us that its models are worse than worthless. You can’t be 100% wrong 100% of the time without constantly inputting the wrong data and ignoring the right data, or have your econometric models working exactly opposite to the way the real world works. This is evidence of persistent delusional thinking.
Therefore I will not evaluate the current survey here. If I have time this week, I will update the article I wrote last year for The Wall Street Examiner, and will post it here on Seeking Alpha.
At the January meeting, the consensus of FOMC members was that the economic recovery would be sustained and would gradually strengthen over coming quarters. Given its history, this seems guaranteed to be wrong. They forecast that the unemployment rate would decline. They could be right about that, but it would be irrelevant. It would only decline because greater numbers of long-term unemployed would be dropped from the labor force.
I found a statistic that is never publicized in the mainstream media, which I have saved just for you. This data is the total number of persons collecting unemployment compensation, including those collecting emergency extended benefits (EB). EB numbers are only ever reported by the Wall Street media in an occasional aside. None of them are tracking the numbers on a historical basis. When the media reports on continuing claims, they only report the regular state programs, which cover only about half those receiving benefits. That number has been around five million, and shows a declining trend, implying that more people are working. In fact, more people have been moving into the extended benefits programs since continuing claims peaked in April 2009. The total number of those receiving benefits was 9.25 million as of January 29.
[Click to enlarge]
This chart clearly illustrates that trend. Furthermore, the total number of persons collecting benefits hasn’t budged since last May, nine months ago. If the numbers decline, my bet would be that it’s on account of those losing benefits, not those getting jobs. Unfortunately, as of this writing I could not find data on those whose Federal extended benefits had been exhausted. I'll keep working on that.
The FOMC members were disappointed “in both the pace and the unevenness of the improvements in labor markets and noted that they would monitor labor market developments closely.” In other words, they care. They really, really do -- and if they need an excuse to continue QE2, there it is.
The minutes noted that a few members complained that rising commodity prices were beginning to squeeze U.S. companies, some of whom were threatening to pass on the cost increases. Noting this sentiment is called “lip service.” A couple of members also noted that the improvement in the economy could be from “factors that could prove temporary.” Again, lip service.
The media calls the people expressing these sentiments “hawks.” I call them “realists” who are tilting at windmills. They have it right, but nobody is listening. I suspect that their language was much stronger than the minutes show. The fact that they were recognized at all shows that Bernanke is worried, but for now they’ve decided to downplay the dissent. When things go in the tank, he can always claim later to have been one of the realists, but that he was swayed by the consensus.
The committee admitted to some worry about European sovereign debt and state finances in the U.S. But this was simply seen as a “risk” to its consensus opinion that things would get better, not a ticking time bomb getting ready to blow up the world. It didn’t say exactly why it expects things to get better, but it seems that it is able to note why they might get worse. The “upside risk” it saw was that household spending would be stronger than expected, leading to a stronger recovery. Again, it didn’t say why. The idea that Ben’s stock market bubble would trigger a spending binge by the top 10% seems to be behind that thinking.
It finally admitted to greater worry about inflation, saying that the “risks of disinflation” had declined. At least in a backhanded way, it acknowledged the inflation risk. I like that word “disinflation.” The other D word is apparently one of the Fed’s seven dirty words, although it did slip into the minutes twice.
It felt that "resource slack" would prevent most companies from passing on cost increases. But it also admitted to not having a grip on the mechanisms of price increase! “In any case, the factors affecting the ability of businesses to pass through higher prices to consumers were viewed as complex and hard to monitor in real time.” Can you believe that? This institution has had nearly 100 years to figure out how to carry out what for it is Job One -- namely to keep inflation low -- and here it is admitting that it doesn't have a clue what it is doing. The excuse that it can’t monitor price change in real time is bull. I guess it never heard of Massachusetts Institute of Technology, which publishes the Billion Prices Project. Bernanke, after all, is a Princeton boy.
The report again paid lip service to the realists who worried about big increases in inflation ahead. “Some participants expressed concern that in a situation in which businesses had been unable to raise prices in response to higher costs for some time, firms might increase them substantially once they found themselves with sufficient pricing power.”
In fact, we know from watching the MIT BPP that this has already been happening. It started soon after QE2 began. Personally, I know it from the miraculous shrinking pound of coffee, which is now down to 10½ ounces, and my $2 loaf of bread, which is now five bucks. But as we know, food inflation does not count because it doesn’t affect upper income consumers. The rising prices of the everyday necessities of life that are crushing middle-income consumers' discretionary spending are simply not included in the core rate of inflation.
U.S. companies will either raise prices or stop producing if the costs squeeze them enough. Many retailers will experience shortages as China's platform manufacturers become unable to produce products profitably. Most likely, we’ll see some combination of price increases and shortages, none of which will matter to the top 10%. They’re laughing all the way to the bank with their stock bubble profits while what is left of the middle class gets mercilessly squeezed. This is the real legacy of QE2 -- the one for which Bernanke refuses to take responsibility.
Finally, the minutes re-emphasize that the Fed really is paying attention to inflation risks, even though it can’t see them, doesn’t know how to measure them in real time, and doesn’t understand how they are transmitted. Obviously it doesn’t know what to do about inflation, because it is so blindly committed to its catastrophic policy of pumping printed money into the market. But it’s good to know that it is paying attention, and that as soon as it sees inflation, it will be ready to deal with it. You see, the Fed has been practicing ways to remove its “current exceptionally accommodative stance of policy.” The Fed wants you to know that, so that you will continue to have confidence in its omniscience and omnipotence. Unfortunately, however, the Fed cannot see something that it refuses to admit exists.
In the policy recommendation section, the minutes paid lip service to the realists (a.k.a. hawks), who opined that maybe, just maybe, things had progressed enough that the Fed should begin to withdraw QE2. But Bernanke had decided that “it was unlikely that the outlook would change by enough to substantiate any adjustments to the program before its completion.” And the sycophants, who constitute the majority, were quite content to kiss his butt, secure in his delusion -- and theirs.
If you want to protect yourself from all the nasty repercussions of QE2, then read between the lines with me. Follow the money, not the words. Understand how the Fed is attempting to manipulate you.The markets are not behaving in response to what the Fed wants you to believe -- that the economy is in a self-sustaining recovery. It is not. The idea that it is is specious and unsupportable. The last we looked, the Fed started printing because the economy was beginning to contract again last spring and summer. The best and most recent evidence we have is that without QE2, the economy would contract.
The indications that we do have suggest that the economy is responding in knee-jerk fashion to the Fed's direct injection of massive quantities of money into the financial system. These injections directly trigger speculation and inflation of commodity and stock prices, along with unstable increases in some economic activities.
So watch what the Fed does, not what it says, and be clear that the markets are behaving in direct response to QE2, not some imaginary self-sustaining recovery based on nothing more than wishful thinking. The stock market bubble and commodities bubble will collapse when Bernanke is finally forced to pull the plug on QE2. Manage your money with that in mind. Keep an eye on MIT's Billion Prices Project. The faster that moves higher, the more likely the Fed will be forced to retreat. Don't be caught long in the selling stampede when that happens.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.