Monday, October 4, 2010

The FED is Delusional

Short on time waiting to see the New England Patriots gets crushed in Miami tonight. Not anywhere near as much fun as waiting to go out and crush Miami, but it is what it is.

Jealous Much?
One of the main reasons I really hate stopping over at The Reformed Broker is that Josh Brown runs with a great idea for a post that leaves me thinking I need to stick with the day job. Today in maybe the best post of all time, Josh uses the medium of Transformers to annotate some major market robot players:
Decepticon Tradebots
One sample and then you should read them all:
StopDropper - Sniffs out all outstanding stop loss and stop limit orders, triggering them with short sales, covering once the stock has been drilled lower. Guaranteed profits await, also transforms into a dump truck.
Love it!

The FED is Delusional
Monday was a full court press by FED members and associated players screaming how QE 1.0 saved the economy and maybe stopped global warming. Just think of the possibilities for QE 2.0! We just might have peace in the Middle East yet if the 10 year would just drop another 14 basis points! We are all saved!

First up was Brian "The Potato" Sack who chimed in with such glowing praise for QE I felt a little warm and made sure I had not peed in my pants (via Calculated Risk):
It is true that certain aspects of the transmission mechanism are clogged because of the credit constraints facing some households and businesses, and it is true that monetary policy cannot directly target those parties that are the most constrained. Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.
At least they have stopped pretending what their primary mission has always been. Refreshing honesty, though for a LONG time many refused to believe this. There is more in Sack's long speech but that was the main point.

Boom Boom Bernanke was stuck talking to college kids, most of which will not be able to find a job after graduation, but thanks to QE 2.0 maybe they will not need one if AAPL and BIDU go to $5000 a share and then split 5:1. Some notes from the low rate guru:
Bernanke says more Fed asset purchases could help
In a wide-ranging, hour-long forum with university students, Bernanke also defended the U.S. government's often-criticized program to support banks during the global financial crisis.

The Troubled Asset Relief Program, or TARP, has turned out to be a "pretty good investment" for taxpayers as the money loaned to banks is returned with interest, he said.

Many people don't understand that the financial bailout fund was designed to help the economy, not the banks, and that the country's economic downturn would have been much worse without it, Bernanke said.

The $700 billion program was approved by the U.S. Congress at the height of the financial crisis in October 2008. The program came to an end on Sunday as the Treasury Department's authority to make new investments expired.

The Obama administration said last week the ultimate cost of the program to taxpayers was likely to come in below $50 billion.

Bernanke, speaking to about 150 students from universities across the state, tried to allay their fears about facing huge student loans and a weak jobs market upon graduation.

"I'm sorry the economy is not stronger for you right now, but it will get stronger," he said.
That was some sickness Boom Boom. You have no shame, but you do have balls.

So TARP was for the economy, not the banks! QE 1.0-10.0 will be for the economy as well and not a shuffle game between the FED and Banks. No way. With unemployment at the same level for over a year, Bernanke still thinks a higher stock market will lead to a recovery in the real economy. Just put on a Greenspan suit already Ben!

So what can we expect from QE 2.0? I checked in with Econbrowser and there was an estimate:
In recent years, a 100-basis-point move in the fed funds rate has translated into about a 40-basis-point move in the 10-year yield (e.g., Table 2 of my 2008 study). Hence if we use the lower end of Dudley's range, we might come up with a number of (400/500)(1/2)(40) = 16 basis points as another ballpark estimate of the effect on the 10-year rate of another $400 B in long-term bond purchases.

But even if we agree that the Fed could depress long-term yields with these kinds of measures, it is a separate question as to whether it should. I discussed this issue a few weeks ago. I remain of the opinion that while the Fed is understandably reluctant to embrace QE2, it may have little other choice.

16 basis points for 400 Billion of purchases? I can imagine businesses all across the land chomping at the bit to grab this deal when it comes through!

So this all comes down to one thing and one thing only:
Does the FED think 16 basis points lower on the 10 year will result more economic activity?

There is only two ways to answer;
-They do and they are so clueless it is dangerous
-They know full well it is baloney, but hope the sheep will bid up assets all over due to the perception the FED is "on the case".

I have written before that even though I am rough on the guys over there, they are not stupid. I 100% believe they think most of us are though, and we usually deliver on that promise as well.

What jumped out at me today was the timing of these remarks. It is a full month before the actual QE 2.0 can be rolled out and I wonder if the FED was not looking to get the markets going on taking rates down ahead of that time. I try never to think like the FED because I get visions of destroying the middle class and firebombing people's savings stuck in my head and it is kind of creepy.

"Mr Bernanke, you WERE the caretaker of the Overlook Hotel Saving and Loan were you not?"


"Here's Easing!!"


Have a good night.

7 comments:

Downtown Josh Brown said...

You're far too kind.

thx!

JB

getyourselfconnected said...

Credit where credit is due, I am stimulating credit!

GawainsGhost said...

I wouldn't count out New England against Miami just yet. Look at what happened yesterday--it was a wild and whacky day of games.

I didn't get to watch them, because I had a lot of work to do, but I did get to listen to updates on Sirius NFL while driving around. I love that channel and highly recommend it.

Great observation Brown on Transformers--"Guaranteed profits await, also transforms into a dump truck." Brilliant.

You wouldn't believe the house I just back from. It mean, it was in reasonably good condition for a repo, and you've seen what I have to deal with, but the paint scheme was atrocious.

I've decided that real estate drives people insane. Not that it affects me, as I was already crazy before I got into this business. But seriously, what are people thinking when they paint their homes?

Eventually, they're going to try to sell it. What if no buyer has the same taste?

Then the sellers gets nowhere near the price they wanted.

This is your nest egg--it's an "asset"! Guaranteed profits, although transformed into a dump.

Go figure.

scharfy said...

Miami is playing fast and physical. Pats win this and ill be impressed. No gimme games in the NFL.

My bears got ruffed up bad last nite...

getyourselfconnected said...

Umm, the Pats win if Miami does not come out for second half!

I hope Cutler is ok, I still like Chicago.

scharfy said...

Just like that...

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