FED Reaction from Around the Web

Another day, another dollar or so they say.

FED Reaction from Around the Web
I ran across many excellent one liners or short snippets that were insightful and/or funny regarding the FED decision to buy more treasuries with money they make on MBS assets they bought with treasuries. I know that sounds weird, but this is what passes for monetary policy.

My own take on the FED move today is that they are now deeply enmeshed with Wall Street. As I wrote last night, unable to influence the real economy the FED will now make sure Wall Street is getting all they need to keep the indices up. Absent that outlier (a higher stock market) there has been no real improvement in the economy in a long time. Everyone on the street knows it, and I think the FED does as well. There does seem to be a little gamesmanship going on here though; the FED does not want to keep doing these things and would prefer CONgress do something while the CONgress is scared to death of the November elections and would prefer the FED to do all the work! Classic indeed.

On to the rip offs!

The Housing Time Bomb noted a crazy day for the 30 year bond and closed with:

Expect some serious unintended consequences from today's policy shift. We already saw one today with the move in the 30 year.
Folks, you need to seriously ask yourself why the Fed decided to pile into treasuries when rates are at all time lows. I mean what is the point? It's not as if this is going to push rates much lower.

Short term treasuries are about as crowded a trade right now that I have ever seen.

Keeping things short and sweet, The Reformed Broker offers:

So the Fed Groundhog came out of his hole at 2:15 pm today, sniffed the air, took a glance at the data and decided that there will be 6 more months of kitchen-sink policy. He certainly signaled a continuation of economic winter.

You knew Paul Krugman was going to be unhappy unless a 5 trillion dollar program was announced, and he does not disappoint:

Roughly speaking, it has gone from a completely crazy policy of monetary tightening in the face of massive unemployment and incipient deflation, to a policy of standing pat in the face of same. Whoopee.

Does that make this a whoopee cushion move Paul?

The Golden Truth wonders:

The FOMC announced today that the Fed will be buying more Treasury debt to help support the economy. Can someone please explain to me how enabling the Government to borrow even more more money actually supports the economy?

Sorry, I cannot help with the answer!

This Yahoo Finance piece was full of fun lines:

"I don't think they are going to raise interest rates until it is very clear that unemployment is moving definitively lower and that doesn't look likely until late 2011," said Mark Zandi, chief economist at Moody's Analytics.

But was it not Zandi that wrote the paper "How the FED/Treasury Saved the World"? I am thinking of a term for this guy that I have not heard in a long time...give me a minute...it is.....POSER!

"The Fed talked loudly but carried a small stick," said Joel Naroff, president of Naroff Economic Advisors.

Another one ultra long SPY going into the meeting. Poor guy.

"The news is positive but not meaningful," said John Merrill, chief investment officer of Tanglewood Wealth Management in Houston. "The money is a pittance."

You are welcome!

The NY Times header reads:
Fed to Buy U.S. Debt, Saying Recovery Has Slowed
This time it's different!

While not related to today's action, Kid Dynamite notes a Ben Bernnake quote from earlier:

"Unlike the federal government, every state except Vermont is required to balance its budget, forcing spending cuts, tax increases or both -- actions Federal Reserve Chairman Ben Bernanke said last week are contributing to the nation’s sluggish recovery."
Translation: Our inability to spend beyond our means is hurting our "recovery."

All you need to know in one sentence.

Have a good night.

Wednesday FOMC Day

I got a sense there was more attention than usual to the FOMC announcement today. I have no idea why that would have been. I will try and make some sense of it all tonight.

Reason Number 1,245,678 to Vote Against Every Incumbent Everywhere: Hypocrisy
Back in time around late 2003 Massachusetts had a Republican Governor. There was a huge fear by the 92% democrat held state government that if John Kerry should beat George Bush for the Presidency, the governor would appoint a Republican senator to replace him. The state legislature immediately went out and over the course of 2 weeks changes the longstanding rule to allow for a special election to fill the seat.

The argument was that the will of of the people must be followed, not the whim of a partisan governor. Ok, I'll play. While I think changing an almost universal rule was an over reaction, I allowed that the argument that lack of representation until a special election better fits a state like ours. Fair enough.

Fast forward to today, 2009. Senator Kennedy has recently passed, and the special election is set for this late fall. But now of course, the ability of a democrat governor is impaired by the very rule the 92% majority forced through as law an this of course cannot stand. Again, in the space of two weeks the law has been changed to allow the governor to appoint a replacement on temporary basis, until the special election. And what happens should another republican win the top office? I think you can figure that out.

I point this out to highlight hypocrisy. I am sure the same games go on in heavily republican states with the same kind of intellectual dishonesty. What can you do? Easy, vote against every single incumbent come next election. That way at least you are sure to get new hypocrites.

The Bubble in Gold Debate
I really wanted to leave this one alone, but of course "Just when I thought I was out, they pull me back in". My good friend over at Illusion of Prosperity wonders in last nights offering "Is There a Gold Bubble?" The author writes:

In my opinion, in order to justify gold's current price then inflation better show up at some point. Further, if inflation does show up there are probably better things to hoard than something that has already risen by a factor of four. Toilet paper continues to come to mind. Just a thought.

I know this isn't going to be popular with the gold bugs, but I just call it like I see it. I'm not saying gold is in a bubble, but I certainly have no interest in buying it (again) at these prices. There is serious risk at these levels and that is not something I look for in a "safe" store of value. Maybe that's just me.

My first thought is "it is far too hard to identify bubbles as they are forming, but better to try and mop up the mess after they have burst"...I am kidding! That was the FED's answer to the DotCom bust!

Because I know the author well I can guarantee he is not a gold hater by any means, he just sees better opportunities right now. Given the current market mess, I think anyone espousing putting all your eggs in one basket is asking for trouble as well.

My answer about a golden bubble was written on March 27th of this year. In a post titled "Will the Next Asset Bubble Please Stand Up?" I laid out the following criteria for a bubble to happen ( I hate to quote myself!):

To find that next great chance at a lottery winner, we must first describe some criteria that have to be met for the next bubble to really take off. Here are some qualities I think would be needed:
- Exciting (E): to foster attention and participation said bubble has to have an element of excitement. Junk bonds are so boring, you know?
- Leverage Access (L): for a bubble to really get going you need access to leverage to expand buying power above and beyond that which is directly available to the buyers.
- Believability (B): the next bubble needs a believable storyline, well at least a good story. We all know beanie babies are not going to cost 1 million dollars, but a condo in North Dakota? Maybe!
- Low Entry Threshold (T): the next bubble will not be in some kind of hedge fund that requires 100 million in assets to qualify for participation.
- Displayable Results (R): like YHOO stock rolling up 30% every month or a home going up in price 20% every 3 months, there has to be some way for the masses to show their awesome investment skills off to the world.

With an eye on this criteria, lets look at some possible candidates and score (1 lowest, 10 highest) them on each category.

I looked at Oil, Real Estate (again!)and Gold. On gold, here was my scoring:

Candidate 3: Gold
E score: 9
Gold is about as exciting as it gets. Shiny and never changing, gold gets the blood pumping
L score: 4
While ETF's can be bought on margin, real bullion sellers will not play loose with the leveraged buying only by all but the big boys.
B score: 9
If you think paper money the world over is backed by mostly nothing, gold sells itself. That gold has been money since the dawn of man is a solid tale.
T score: 3
A little gold is easy and cheap. Any real amount gets expensive, fast.
R score: 9
Gold prices run on most market tickers and eBay can always get you excited about how much you could auction your gold off at.
Total score: 34

In reference, Gold scored higher than Oil, but below a replay of Real Estate.

I think the leverage issue is a major one. The main point to take home is still how small an investment gold is for almost the entire US market.

Can gold be overpriced right now? Yes, it can. Can gold have much further to go to the upside? Of course. If gold is indeed a bubble, it was the slowest expanding bubble in history. We have yet to have the blow off top where taxi drivers are telling you to buy gold!

The debate is always fun, but as always a balanced portfolio with out all bets on one sector has always been my position. If you are of the end of the world bent, items other than gold will be far more useful. Scope out Survival Blog to understand just what the minimum would require.

Wednesday FOMC Day
The FED announced nothing earth shattering today. The only change was some language about some pick up in economic activity. The FED said they will extend MBS purchases out longer, but in smaller amounts. That was about it.

The market I think was front running some kind of expansion of both the treasury buying and MBS buying. The sell off after the news would back this up. I would caution the bears about getting excited here, by tomorrow the bulls will have a new story to rally around.

As far as the FED, they in no way hinted at any exit strategy, no matter what you will read across the media today. They all but bold typed the "we reserve the right" to expand these programs. In light of the dollar beating that has been going on, the FED should play for time before rolling out more market support, and that is all they did today. The end of October (treasury purchases) is still far off, and March of next year (MBS buys) may well be 2020 for how long that will seem in economic terms.

For all the economists out there that can summon cool charts and make awesome graphs I would offer you a homework assignment. Figure out how far "below capacity" the US economy would run at even historically "normal" interest rates. Try out a FED rate of even 2%, 3%, and all the way up to 5%. Still think a rate hike is coming before 2012? Run those numbers again.

Have a good night.

Money Printing Nirvana

Rain and mist all day today. Same story for some time now. Rumor has it the Sun will be out tomorrow and it will be north of 80 degrees. I hope my skin does not burst into flames when the light actually hits it again. Hopefully my melanocyte recruitment cascade pathway is still working after almost 10 days of darkness! Wow, that was kind of geeky.

Blog Notes
With the return of the Sun, I am going to hope for a real start to the summer. What this means is the dreaded "summer posting" type schedule. Right before and then after July 4th it is my fishing season. This usually run into late September, though the NFL takes over then to a large extent. I also will be playing some more tennis more frequently. Add to this my brand new back deck and new front lawn and I think I am going to have a fun and busy summer.

What this all adds up to is less frequent posts. I would say every day will be out for sure, but not once or twice a week either. Friday night is always my favorite blog of the week. Maybe weekend wrap ups as well will be added. Yours truly does have a life outside or writing and the summer time is the right time. I know all the loyal readers understand, and I am sure their blog reading time goes down in the summer months as well. Never fear, I will be here.

FOMC Day
Today had all the drama of watching paint dry. A basic rerun of the same statement from last meeting, though the FED did leave out the actual term "deflation" as not to scare anyone. As usual, the real fun is in the stories that are run after the statement and today was no exception.

Consider this AP story (via Yahoo Finance) which open with an absurd jump of logic, but of course just leaves it on the table as is:

Fed says recession easing, inflation is tame
WASHINGTON (AP) -- The Federal Reserve signaled Wednesday that the weak economy likely will keep prices in check despite growing concerns that the trillions it's pumping into the financial system will ignite inflation.
Fed Chairman Ben Bernanke and his colleagues held a key bank lending rate at a record low of between zero and 0.25 percent. And they pledged again to keep it there for "an extended period" to help brace the economy.
The Fed is sending the message that the economy is making progress toward a path of recovery, that the credit markets appear to be healing and inflation is not going to be a problem," said economist Lynn Reaser, vice president of the National Association for Business Economics. "The bogeyman of deflation also was removed from the Fed's primary risk list," she added.
The Fed in March launched a $1.2 trillion effort to drive down interest rates to try to revive lending and get Americans to spend more freely again. It said it would spend up to $300 billion to buy long-term government bonds over six months and boost its purchases of mortgage securities. So far, the Fed has bought about $177.5 billion in Treasury bonds.
The Fed is on track to buy up to $1.25 trillion worth of securities issued by Fannie Mae and Freddie Mac by the end of this year. Nearly $456 billion worth of those securities have been purchased.

There is a lot of stuff here, so lets start with the smaller items;

-The FED has made it clear that a rate hike is off the table. I will now accept apologies form all those saying the FED would be raising rates in August. You were all dreamers and you are all now proven wrong. The rates will be zero for an "extended" period of time. So unless you cannot read that means ZIRP just got treated with ExtenZe and so knock off the "rate hike" and "exit strategy" talk.

-The FED is truly all powerful as both inflation and deflation are pronounced dead as of today by the FED. They only said inflation was "well contained" (uh oh!) and they did not bother to even mention deflation (uh oh!). The FED has engineered a perfect outcome and one they are in total control of, if you read just this article that is.

Money Printing Nirvana
My last point is the major one. Reread that first line:
"...the weak economy likely will keep prices in check despite growing concerns that the trillions it's pumping into the financial system will ignite inflation."

The FED feels that because wages are static or going lower and the price of an XBox is static or going lower they can create money unabated with no consequence.

Now, Economic Disconnect, you might say "all that money is not going into new credit, hence there is no velocity of money, thus no inflation as it can only cover debt destruction". And of course you are correct and the next step is deflation.

To this I would ask;
-If wages could be kept low (by economic factors or edict)
-If consumer prices could be kept low (by lack of demand or edict)
-If banks will not lend out money, but instead use it to write off debt (this may well be what is going on)

Then would it not be nirvana to simply print enough money to cover all debt, call it "cancelled out" by all the new paper, and start all over again?

Indeed, this seems so devilishly simple I would wonder why every nation in the history of the world has not had this as their economic centerpiece.

And I think this leads me to my "inflation" predisposition. You may define inflation as an increase in the money supply, but I could define it as de facto devaluation. If the US prints say 10 trillion dollars to absorb mortgage losses, credit card losses, commercial real estate losses and other losses not yet known then yes, that money never enters the money supply as new capital. But it was used to pay for the debt that was taken on and could not be paid back in real money. As a creditor you just got paid back with printed money that came from nowhere. At this point the currency has no moorings in reality (not that it does now, but if kept as a slow process the world accepts this as a cost of doing business) and thus any creditor will want either MORE of the dollars, or they will not want them at all and demand payment by other means.

This is the danger of the "printing press", not hyperinflation because of a sea of money, but inflation due to limited desire for a particular money or a lack of belief in a particular money form.

Now I understand that because this has not happened as of yet to the US, nor in it's history many think this will never happen. I also have respect for the "other currencies are worse off, so the dollar will always be strong" argument for what it attempts to imply.

It reminds me of the old line:
"When you owe the bank $100 that is YOUR problem; When you owe the bank 100 Million it is the BANKS problem".
(Aside: this joke needs to be corrected for today's dollars!)

The US owes so much money that indeed it is in the best interests of most of our creditors to play pretend and allow the US to do what it is doing with the money creation. I have discussed the possibility of a debt "Chandrasekhar limit" many times. I think we finally get an answer to that question.

Have a good night.