September 2014 – Page 122

Jacob Sullum on Obama's Lame Excuses for Going to War Without Congressional Approval

A few years ago, when President Obama
unilaterally decided to get involved in Libya’s civil war,
he argued that he did not need approval from Congress
because bombing military targets did not constitute “hostilities”
under the War Powers Resolution. That argument was so laughable,
Jacob Sullum writes, that it was rejected even by the war’s
supporters in Congress and the press, not to mention Obama’s own
Office of Legal Counsel.

For a while last week, Sullum says, it seemed the Obama
administration was trying out a variation on that claim as an
excuse for the newly expanded military campaign against the Islamic
State in Iraq and Syria (ISIS), which Secretary of State John
Kerry repeatedly refused to call a war. But the White
House quickly corrected Kerry: This is a bona fide
war—just not the sort that Congress has to declare.

View this article.

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Brickbat: Eat Less Chikkin

In California,
Ventura High School Principal Val Wyatt barred the football booster
club from selling meals donated by Chick-fil-A at back-to-school
nigh to raise money. Wyatt cited company President Dan
Cathy’s opposition to gay marriage as the reason for the ban.
Superintendent Trudy Tuttle Arriaga backed up Wyatt. “We value
inclusivity and diversity on our campus and all of our events and
activities are going to adhere to our mission,” she said.

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Can The Petrodollar Survive Low Interest Rates?

Submitted by Luke Gromen via Sprott Global,

Where does capital really come from?

Most US policymakers believe that capital comes from debt issued by the Fed and its member banks; most other big debtor countries agree (i.e. Japan). On the other hand, policymakers of the world’s biggest creditor nations (led by China) believe that real capital is the surplus produced from production and trade (which has been mainly accumulated in US dollars and ultimately backs the US dollar as the primary reserve currency).

For the past 7-12 years the two conflicting ideas about capital have begun to have noticeable effects in certain global asset markets. The chart below, showing gold, oil, and Fed Funds rates, illustrates what has occurred. For most of the three decades from 1973-2002, these asset classes traded closely together; in the last decade, they have been diverging dramatically. We’ll explain why this happened and the critical implications it holds for the USD prices of oil and gold.

FRED FFTT 1

Under the “Petrodollar arrangement,” key oil exporters promised to only price oil in USD and US interest rates were then managed so that oil exporters were indifferent to whether they stored currency reserves earned from oil exports in US Treasuries or in gold (which had always settled oil prior to 1971 via a gold-backed USD and, prior to that, gold-backed sterling).

At the time, the US was the world’s largest trading nation and oil producer. The Fed consistently managed the Fed Funds rates to keep oil prices steady, even when it required mid-teens interest rates and back-to-back recessions in 1980-1982. Since US Fed Funds rates were managed to preserve US creditors’ and oil exporters’ purchasing power in oil terms, the system proved acceptable to most nations.

While the Petrodollar arrangement worked well for nearly thirty years, the arrangement began to wobble beginning around 2002-04, due to a unique combination of factors:

The US economy had become increasingly ‘financialized’ from 1981-2000 – the percentage of US GDP derived from sectors such as finance and real estate had risen significantly. This was driven by steadily falling interest rates from the early 1980’s onwards and financial innovations such as securitization of consumer and commercial loans. This meant that cheap credit became more important to the US economy than cheap oil. This led to both a significant increase in US aggregate indebtedness and a rise in employment levels for jobs in origination, servicing, and managing credit products in the US.
Rapid economic expansion and oil consumption growth in Emerging Markets, combined with stagnant supplies from global oil fields, drove the price of oil higher. Emerging Markets were on their way to becoming the biggest consumers of oil (and share of global GDP) for the first time ever.

Oil prices began steadily rising in 2002 and 2003 while Fed Funds rates remained low to mitigate the fallout from the 2001 US recession/Tech Bubble. As a result, the number of barrels of oil that could be purchased for a face-value US Treasury bond declined sharply.

In the chart below, you can see that in 2004, face value US Treasuries “broke support” to new 20-year lows versus oil. The dollar was collapsing against oil, likely to the chagrin of oil exporters (and US creditors like China that needed oil imports) holding US Treasuries from years of exports to the US.

FRED FFTT 2

After maintaining a range of 55-60 barrels of oil per US Treasury from 1986-1999, a $1,000 face value US Treasury went from buying 60 barrels of oil in 1999 to under 30 by early 2004.

This threatened the Petrodollar system. Since US Treasuries were collapsing versus oil prices oil exporters might eventually be better off leaving oil in the ground. This forced US policymakers into an important decision:

Raise US Fed Funds rates to strengthen the dollar relative to oil, thereby supporting the Petrodollar system, or;
Allow the Petrodollar system to fall apart.

The US decided to go with the first option; in June 2004 the Fed began raising rates slowly. This was bad for the US housing market, which had become dependent on a variety of highly-levered mortgage products that were often tied to Fed Funds rates. The housing market began to weaken as rates rose and after only 12 months and a 4.25% rise in interest rates the housing market peaked in 3Q05 and then began to weaken notably.

It was a critical but little-appreciated moment in US economic history. The US economy had now become too ‘financialized’ to withstand anything more than token interest rate hikes.

The US economy limped along in 2006 and early 2007 until collateral damage from falling home prices began to spread into the broader financial system, first through subprime loan defaults, then into more traditional lending markets. It wasn’t long before the global banking system was affected, along with other levered institutions like AIG. To prevent big banks and financial institutions from going under, the US Fed first slashed rates to near 0% and then expanded its balance sheet 5 times in 5 years to an unprecedented $4.5 trillion. While these moves “saved the system” from systemic collapse, they came at a significant cost:

US policymakers and pundits took 2007-08 to mean that the US could never default on its debt because the Fed could always print money to pay back debts that are denominated in US dollars.

Oil exporters (and other US creditors) took a very different lesson from the crisis: The US economy had now become so dependent on low interest rates that it could never again manage its interest rates to keep oil prices steady without blowing up the global financial system. The Petrodollar system, which had allowed the US dollar to supplant gold as the backing for the oil trade from 1973-2002, was irrevocably broken.

Understandably, creditor nation policymakers did not find lending money to the US at near 0% to buy real goods and, most importantly, oil from creditor nations particularly attractive. That arrangement would be akin to a land lord lending to her renters cash at 0% interest to pay their rent.

So as the Fed expanded its balance sheet 5.5 times from 2009 to 2013, creditor nations deployed significant amounts of capital into a variety of real assets including physical gold. Why physical gold and not gold futures?

Another lesson that the creditor nations learned from 2007-08 was that any highly-levered US financial market (like gold futures markets) is ultimately a general obligation of the US government and US Fed and will, if necessary, be paid out in cash.

After concluding that US policymakers could never again manage the relationship of Fed Funds rates to oil prices, creditor nation policymakers began reverting to the oil settlement asset that had been used for decades before the Petrodollar – physical gold. Physical gold collateral was removed from the western bullion banking system, leading to the sharp drop in gold futures prices seen in 2013.

What does this mean for gold and oil prices going forward? It’s likely quite bullish for both. Gold could be returning to th
e global financial system as a means of settlement, which could ultimately drive physical gold prices significantly higher through higher demand. The price of US oil imports would likely increase if the dollar loses its 41-year monopoly in settling oil trades. This would provide an incentive for increased North American oil production and benefit companies involved in the domestic energy services sector and related manufacturing industries.

The rollout of yuan-denominated physical gold trading in the Shanghai Free Trade Zone is set to begin September 29¹, followed by the rollout of yuan-denominated oil (and other commodities) expected before year end. The pricing of oil in yuan and ability to settle that trade in physical gold also priced in yuan may prove to be a critical milestone for the return of physical gold for settling international trade.

via Zero Hedge http://ift.tt/1mcPdkh Tyler Durden

How Banks Continue FX Rigging Right Under The SEC’s Noses

The good news is that the rigging of the FX markets – now conspiracy fact, not conspiracy theory – has, according to Bloomberg, forced the world’s biggest banks to overhaul how they trade currencies to regain the trust of customers and preempt regulators’ efforts to force changes on an industry tarnished by allegations of manipulation with the “modernization of processes that probably should have been brought in 15 or 20 years ago.” However, the FX market is far from ‘clean’ as Bloomberg notes, while banks can limit access to details about client orders on their computer systems, they can’t keep employees from talking to one another. Some traders also are still communicating with clients and counterparts at other firms via Snapchat, circumventing their company’s controls right under the nose of the SEC. As one trader commented, “these [reform] changes look like fig leaves.”

As Bloomberg reports, positive changes are happening (on the surface)…

The world’s biggest banks are overhauling how they trade currencies to regain the trust of customers and preempt regulators’ efforts to force changes on an industry tarnished by allegations of manipulation.

Barclays Plc, Deutsche Bank AG, Goldman Sachs Group Inc., Royal Bank of Scotland Group Plc and UBS AG, which together account for 43 percent of foreign-exchange trading by banks, are introducing measures to make it harder for dealers to profit from confidential customer information and take advantage of clients in the largely unregulated $5.3 trillion-a-day currency market, according to people with knowledge of the changes.

Banks have capped what employees can charge for exchanging currencies, limited dealers’ access to information about customer orders, banned the use of online chat rooms and pushed trades onto electronic platforms, according to the people, who asked not to be identified because they weren’t authorized to discuss their firms’ practices.

“This is finally bringing the FX market into the 21st century,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics who specializes in the governance of banks. “What we’re seeing is a modernization of processes that probably should have been brought in 15 or 20 years ago.”

But, beneath the surface, nothing changes…

“The banks are very concerned about what the regulators are going to do, and this makes them look good,” said Colin McLean, founder and chief executive officer of SVM Asset Management Ltd. in Edinburgh, which oversees more than $900 million. “Maybe they think it protects them somewhat from future regulatory changes.”

…

While banks can limit access to details about client orders on their computer systems, they can’t keep employees from talking to one another. Some traders also are communicating with clients and counterparts at other firms via Snapchat, a mobile-phone application that sends messages that disappear, to circumvent their company’s controls, according to a person with knowledge of the practice.

Not everyone is buying the changes…

“For some of the more naive clients, there is still probably gaming going on by the banks because the incentives are there for doing so,” SVM’s McLean said. “These changes look like fig leaves.”

* * *
The rigging continues…

via Zero Hedge http://ift.tt/1qdWoUs Tyler Durden

How Banks Continue FX Rigging Right Under The SEC's Noses

As Bloomberg reports, positive changes are happening (on the surface)…

The world’s biggest banks are overhauling how they trade currencies to regain the trust of customers and preempt regulators’ efforts to force changes on an industry tarnished by allegations of manipulation.

Barclays Plc, Deutsche Bank AG, Goldman Sachs Group Inc., Royal Bank of Scotland Group Plc and UBS AG, which together account for 43 percent of foreign-exchange trading by banks, are introducing measures to make it harder for dealers to profit from confidential customer information and take advantage of clients in the largely unregulated $5.3 trillion-a-day currency market, according to people with knowledge of the changes.

Banks have capped what employees can charge for exchanging currencies, limited dealers’ access to information about customer orders, banned the use of online chat rooms and pushed trades onto electronic platforms, according to the people, who asked not to be identified because they weren’t authorized to discuss their firms’ practices.

“This is finally bringing the FX market into the 21st century,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics who specializes in the governance of banks. “What we’re seeing is a modernization of processes that probably should have been brought in 15 or 20 years ago.”

But, beneath the surface, nothing changes…

“The banks are very concerned about what the regulators are going to do, and this makes them look good,” said Colin McLean, founder and chief executive officer of SVM Asset Management Ltd. in Edinburgh, which oversees more than $900 million. “Maybe they think it protects them somewhat from future regulatory changes.”

…

While banks can limit access to details about client orders on their computer systems, they can’t keep employees from talking to one another. Some traders also are communicating with clients and counterparts at other firms via Snapchat, a mobile-phone application that sends messages that disappear, to circumvent their company’s controls, according to a person with knowledge of the practice.

Not everyone is buying the changes…

“For some of the more naive clients, there is still probably gaming going on by the banks because the incentives are there for doing so,” SVM’s McLean said. “These changes look like fig leaves.”

* * *
The rigging continues…

via Zero Hedge http://ift.tt/1qdWoUs Tyler Durden

Washington’s Bait-And-Switch: NATO Armed Kiev Under Cover Of Ceasefire

Submitted by Daniel McAdams via The Ron Paul Institute For Peace & Prosperity,

Just over ten days ago, as the pro-independence forces in east Ukraine were on the march with significant gains on the battlefield, a ceasefire was signed in Minsk, Belarus. According to the terms of the ceasefire, the pro-independence fighters were to lay down their arms, cease their offensive to regain lost territory in the Donetsk and Lugansk region, and disband.

In exchange for this, the US-backed government in Kiev was to agree to an amnesty for pro-independence fighters, commit to economic development in the east, and agree to enshrine decentralization in law to provide autonomy to the east.

Most importantly, the ceasefire was to stop the Kiev government’s shelling of major population centers in the east and stop the slaughter of military forces on both sides.

It turns out to be a grotesque sleight of hand, with Kiev receiving guarantees at the September 5, NATO summit in Wales that NATO members would provide the military equipment to finish the pro-independence forces in the east after the ceasefire gave time to re-group a badly beaten, largely conscript Ukrainian army.

This grand deception came to light yesterday, as Valery Heletey, defense minister of the US-backed regime in Kiev, bragged that, as Reuters put it:

NATO countries were delivering weapons to his country to equip it to fight pro-Russian separatists and “stop” Russian President Vladimir Putin.

We are already seeing the result of this bait and switch, as yesterday saw a dramatic resumption of the US-backed government’s shelling civilian Donetsk, which is under control of the pro-independence movement.

The ceasefire provided pro-US Kiev forces time to regroup and absorb NATO weapons under the guise of stopping the violence, with the intent of slaughtering rather than negotiating with the pro-independence forces. This is no great surprise, as the February coup itself proceeded with US cooperation just as a compromise power-sharing agreement between the elected president, Yanukovich, and the Maidan rebels was signed.

It remains a great mystery why the pro-independence forces would strike a deal with a Kiev regime which came to power as a result of a US and EU sponsored coup in February, and whose veracity and track record of fair play is rather wanting.

A greater mystery perhaps, is why a Russia that was accused of “invading” Ukraine as the NATO summit kicked off, would agree to the decapitation of a Moscow-friendly independence movement next-door as it consolidated its gains.

Whatever the case, the bloodshed in eastern Ukraine is about to resume. The pro-US regime in Kiev, by deception, is about to claim bloody victory from the jaws of defeat.

via Zero Hedge http://ift.tt/1mcDtOI Tyler Durden

Washington's Bait-And-Switch: NATO Armed Kiev Under Cover Of Ceasefire

Submitted by Daniel McAdams via The Ron Paul Institute For Peace & Prosperity,

Most importantly, the ceasefire was to stop the Kiev government’s shelling of major population centers in the east and stop the slaughter of military forces on both sides.

This grand deception came to light yesterday, as Valery Heletey, defense minister of the US-backed regime in Kiev, bragged that, as Reuters put it:

NATO countries were delivering weapons to his country to equip it to fight pro-Russian separatists and “stop” Russian President Vladimir Putin.

Whatever the case, the bloodshed in eastern Ukraine is about to resume. The pro-US regime in Kiev, by deception, is about to claim bloody victory from the jaws of defeat.

via Zero Hedge http://ift.tt/1mcDtOI Tyler Durden

FED Water-boy Hilsenrath carries the FOMC Gatorade

Courtesy of the SlealthFlation Blog:

Once again, yesterday, The Wall Street Journal dove head first into the deep end of the interactive social media swimming pool. During the FOMC pregame show, they punctually trotted out Johnny Waterboy Hilsenrath via SpreeCast, the sparkling new-media darling interactive webcast platform, to serve up another fresh jug of spiked reinvigorating Gatorade to his favorite NY Stock Market team.

The Webcast was hosted by the WSJ’s own Sudeep Reddy, who was indeed ready to take the mound, lobbing one soft ball pitch after another down the middle of the plate, right into Hilsenrath’s predetermined sweet spot for the deep long ball.

John promptly clocked the first pitch with his corked bat, sending the juiced SPX baseball sailing right over the bleachers of Citi Field of FOMC dreams.

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In case you missed the early game time, the following are the well orchestrated play by play highlights in slow motion direct from the horse’s mouth: (I have paraphrased below, as accurately as possible, the actual live WSJ interactive session.)

Important meeting at the FED today and tomorrow having consequential discussions on interest rates

Not much has changed in the economy since July. The key indicator remains the employment rate (Not consider it the best indicator of the labor market slack) which hasn’t changed and remains at 6.1% exactly where is was when they met in July, so there has been no notable improvement on that. On Payroll employment growth; that has actually slowed down a bit, as we were getting very strong payroll numbers earlier in the year.

The inflation numbers that had picked up earlier in the year, have settled down, still under 2 %. The one change I see is on the growth front it looks a little stronger than it did in July. We could see upward revisions for 2nd quarter growth, it looks like 3rd quarter growth is finally coming in at 3% trend which they have been calling for.

BUT they are a data dependent institution and what the data is telling them is that not much has changed since July.

EVERYONE at the Fed agrees, everyone I have talked to at the FED anyways. I just did a big profile of Yellen, I spoke to a lot of people for that story. They have ALL noted that they job market improvements have been greater than they expected so far this year. They had initially thought 6.3-6.5% by the end of the year. They feel that they need to be responsive to that. HOWEVER, most of the employment improvements came early in the year, and those improvements have stalled out a bit and settling down in pace recently. And, that kind of complicates their discussion, because A lot of THEM, both hawks and doves are now getting uncomfortable with the rigid guidance which is set in their previous policy statement on interest rates, which categorically states that they are gonna keep rates low for quite some time after the bond buying program ends.

There is an internal debate going on right now, as we speak, regarding what to do about that guidance, and this economic backdrop certainly complicates it. Because, a month or two ago you could make an argument that things were improving rapidly, more than they had expected, so they needed to move more quickly so as to alter that forward guidance that they had suggested. Now that the pace has settled down, it has taken a little heat of that consideration.

There are two very important phrases in their statement: “Considerable Time” &“Significant under utilization of resources in the labor market” (a trigger point).

Given what I just said, that the unemployment has not changed since July, when they put that “significant under utilization of resources in the labor market” line in the statement, I don’t see how they change that. In other words, I think when we read this statement at 2 o’clock tomorrow, it’s still gonna say there remains significant under utilization of resources in the labor market, which mea
ns that their policy outlook hasn’t fundamentally changed since July.

Lower Energy prices and USD strength, which reduces import price pressures, both give the fed cause / leeway to be patient.

What they have to do now is look through two narratives; One narrative is that during a lot of this recovery we have seen the unemployment going down steadily, almost a percentage point per year, however, for the last few months since May it has leveled off. They have to decide which of these two trends points to the correct way forward.

There are two narrative around this. One narrative is as the economy recovers, it’s pulling people back into the labor force and the labor force participation rate has steadied, thus as a result of people coming back into the labor force we aren’t going to see the fast declines in the unemployment rate anymore. That points to this idea that the latest slow down that we have seen is going to persist.

The other argument is that unemployment been coming down at this consistently fast pace of almost a percentage point a year, and there is no reason to think that that has changed, all the workers are leaving the labor force, and its gonna continue to decline at a quick pace. This is one reason why they are going to wait and look at couple more months of data before making such an important consequential decision as to when to pull that trigger.

The head line of my thinking is as follows:

The words “considerable time” are still gonna be in there, but they are gonna be qualified in either the statement or during Yellens’ press conference. A number of Fed officials have become uncomfortable with this phrase “considerable time” they don’t want to be locked into some kind of calender mind set. The market tends to hold them to that in some black & white binary way, there’s this idea in the market that it means six months, even though they have been trying to say for a long time now that they are data dependent, and when they raise rates it will depend on how the economy is actually doing.

Everyone from Eric Rosengren, one of the Feds most notable doves, to Charlie Plosser, one of the feds notable hawks, is saying that they want to change that language. And anyways, they have to change that language some how by October, as they have attached the words “considerable time” to the bond buying program that their doing. What I mean is that they have said that they would keep rates near zero for a considerable time after the bond buying program ends, well, the program ends in October, so they got to change that formulation. They are having a debate right now about how to do that. The question is how. Given the economic backdrop; they don’t want to send a signal right now that rate increases are imminent, or that they are locked into a March rate increase period. So I think what they are gonna do at the end of the day is qualify the way they describe the term “considerable time”

There’s a little saying that we should all keep in mind; People in the market often say, “don’t fight the Fed”, well, what I’m gonna say to you now is “don’t over think the Fed!”. Very often, what they’re doing and where they’re going to do is sitting right before your eyes. So I have Janet’s Jackson-hole’s speech sitting right in front of my eyes now. And, she’s been saying this several times. She said it in JH in August, she said it in front of the Senate and House in July. When she talks about this “considerable time” frame work that the Fed has, she has been qualifying it for the last two months, and I’m gonna read it to you:

Yellen at JH: “But if progress in the labor market continues to be more rapid than anticipated by the Committee or if inflation moves up more rapidly than anticipated, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter. Of course, if economic performance turns out to be disappointing and progress toward our goals proceeds more slowly than we expect, then the future path of interest rates likely would be more accommodative than we currently anticipate.”

That is the qualification that they have been trying to get people to embrace, and that becomes the new place holder qualification that they will use at this meeting. One other main point. The FED is a big institution with a lot of inertia, and they have been having a debate about their exit strategy for several moths, and they want to rap that up at this meeting, and that becomes the focus of a lot of discussion today and tomorrow. One of the headlines they are gonna come out with is formalizing some of their exit plan. It becomes a lot, in their mind, for the market to digest to both an exit strategy and change their guidance at the same time. That’s why I think on the guidance front they qualify and leave the hard decisions on the exit out for another day.

I don’t think Janet is comfortable with the generally accepted view that she’s an uber dove, who’s never gonna raise rates. I think she wants people to see that she has a balanced view of the economy, and that when push comes to shove she will make the tough decisions when she needs to.

The Fed doesn’t believe there is a financial asset bubble, when they look at overall leverage in the financial system, the debt carried at financial institution for instance, they don’t see the kind of leverage that we saw preceding the housing bubble that blew out in 2008. So, they don’t think there’s a financial instability problem right now, they’re watching it very closely, they’re watching things like leveraged loans and sub-prime auto, they don’t think there is a bubble, as a result, they believe they have some breathing room for now.

As for the Fed p
olicy debate right at the moment; Two different paths are being considered on how to conduct this interest rate cycle. The soon and slow path, and a late and fast path. In the soon and slow path, you raise rates by starting to move them off the zero bound on the early side, a little sooner than expected even, but you go very cautiously and gradually, you don’t follow that up with succession of other interest rate increases. Their thinking is that the soon and slow path would prevent a financial bubble by dampening carry trades.

The alternative course is the late and fast path, in that path, they wait until they see unemployment much lower, and they wait until they see inflation clearly near their 2% objective, they don’t do anything until they are sure the economy is back on its feet. At that point they are prepared to quickly raise rates back on its normal path. That approach is not directed at the financial stability problem, but rather at getting the macro economy back to where they want it to be. They are debating these two different courses right now, and financial stability is very much part of that discussion they are having about interest rate strategy.

Don’t over think the Fed. Their favorite indicator is the unemployment rate. They believe it’s not a perfect indicator as a result they are looking at a range of other indicators; they’re looking at a broader measure of unemployment including the U6 unemployment rate, they’re looking at long term unemployed, they’re looking at part time unemployed, and they’re looking at wages. So yes, wages is one indicator, however, Yellen said at JH that she sees reasons why it may not be a perfect indicator so she doesn’t want to over emphasize it.

On Job polarization. The problem with job polarization is that you have Jobs going to the low end and jobs going to the high end, and the people in the middle are basically stuck. Since they don’t have the skills for the high end, they tend to migrate to the low end, and that actually puts pressure on low end wages. There are a number of reasons why this is happening related in part to technology and globalization, and that is why we are seeing a two tiered recovery right now. Jobs and wealth are being are being created in large scale for the high income household, as well as many more jobs on the low end. The question is how do fill in the middle. Traditionally, these were manufacturing jobs that we were talking about, and since we have a competitive global market place and a an automated domestic market place, it makes it harder to create a lot of those jobs that the middle class depended on for so long.

They feel that they are well past the deflation scare, right now deflation is mainly Europe’s problem. They saw the very low inflation rates last year as temporary and distorted, and they see inflation picking up closer to 2% now. So they are not worried about deflation. Having said that, they do want to see inflation continue to rise towards their 2% goal, but they are not worried about deflation.

Tipping the economy back into recession is an extremely important concern. This goes back to the all important rate path issue. The argument for waiting for a long time and then being prepared to move quickly if you need to, relates to this point. They do not want to prematurely tighten credit, sending the economy back into recession, in part because they don’t have the tools to deal with a recession. Interest rates are so low that they can’t cut them anymore, if we went back into recession we would get back into this whole QE drama, we would be back into QE 5,6 and 7.

Janet Yellen really doesn’t want to go there, and move the balance sheet to 7 trillion USD. Also, she doesn’t want to make promises that interest rates stay at zero until my kids get out of graduate school. So there is a strong argument inside the Fed for really waiting until you’re sure you see serious traction in this economy before you start raising rates. And, that’s the late and fast approach as opposed to the soon and slow approach. However, they haven’t resolves that, and that’s exactly what they are talking about there.

Finally, the Fed has been working on exit strategy tools. They will further formalize some of those tools that were laid out in July’s meeting regarding Interest on excess reserves over night Repos.

So there you have it, direct from the NY Fed team’s pinch hitter. Batter up! Don’t strike out.

via Zero Hedge http://ift.tt/1oYkJ13 Bruno de Landevoisin

What Might Have Been

Well, here we are again. On Wednesday, an elderly dwarf will capture the attention of the entire financial world as she bleats out whatever she and her minions believe will shore up the house of cards they have created. In a sane and just world, the aforementioned bridge troll would be an untenured economics professor at a mid-tier liberal arts college, but as it is now, Yellen is one of the most powerful humans (more or less) on the planet.

We are six years………..six.……..years……….into this madness, and it shows no sign of stopping. Why should it? After all, statists and central planners have been doing a bang-up job of making the rich richer (which, in spite of the weary “dual mandate” trotted out in front of a smirking Congress, appears to be the only true raison d’etre behind the Federal Reserve).

What if it had gone differently? What if, six years ago, in the throes of the financial crisis, the political leaders in D.C. had decided that enough was enough, and they were going to seize the opportunity to make real and meaningful positive changes? (OK, stop laughing; seriously, stop it; I’m trying to write a post here; bear with me, because this is a fantasy piece, after all). So instead of doing what they did, just imagine with me events more along these lines:

+ Executives are aggressively prosecuted and, where possible, imprisoned – Executives were kicked in the ass during the (much, much tinier) S&L Crisis in the late 1980s; why not do the same now? Angelo Mozilo might look good in an orange jumpsuit; it would complement his flesh tone. Some argue they didn’t break any laws. I am highly confident that, given enough resources, a skilled team of aggressive prosecutors could find a meaningful number of executives and a sufficient docket of salient laws that were bent or broken. For God’s sake, at least give it a shot.

+ 2008 and 2009 bonuses have a special 99% surtax – It was galling that, for instance, the giant bonuses to AIG employees got paid out (Congress whined there was nothing it could do). If the bonuses had to be paid, fine, go ahead and pay ’em. But please take note that all bonuses paid by financial service companies from September 19, 2008 to December 31, 2009 are subject to a special 99% income tax.

+ Goldman Sachs and Morgan Stanley go bankrupt – Yep, just like Lehman. They would probably both ultimately survive in some form, but a far smaller and more benign form than before. Oh, and those payments from AIG Financial Services? Sorry, AIG is bankrupt. They are going to pay out 0 cents on the dollar. Sorry about that. The 100% payment that Goldman actual got………..let’s just say that it didn’t take place, because it shouldn’t have taken place.

+ Confiscatory and Targeted Asset Tax – Basically go after the bad guys. Dick Fuld? Time to pay back all those ill-gotten gains. Same for Joe Cassano. Claw back as much as possible, since God knows the country needs it worse than the 1%.

+ Glass-Steagall Reinstated – Not all of FDR’s laws were bad, after all, and this gem needed to come back. Let’s just pretend that it did, back and even better (and more thorough) than before.

+ Foreclosures Got Foreclosed – Can’t make your mortgage payment? Bought off more than you could chew? Tough titties. The house gets foreclosed. Everyone has to play by the same rules. No mortgage “relief”. No hanging out in the house for years until the bank finally gets the right to boot you out. If you can’t afford it, you can’t afford it. Ta-ta.

+ D.C. Gets Out of the Business of Business – Fannie Mae? Shut it down. Same for Freddie Mac. Oh, and hey you guys at the Federal Reserve: it isn’t your job to push up stock indexes. Your friends may be suffering (if “suffering’ means having a net worth of $50 million instead of $500 million) but you are out of the business of artificially propping up business.

+ America Gets Educated – Americans need to understand why it’s time to take some bitter medicine for the country’s long-term good. There are two aspects to this: shame and knowledge. The “shame” aspect is to make very clear who the nitwits were in government who put us in this position (like, oh, Chris Cox and Phil Graham leap to mind). The “knowledge” aspect is to educate in a systematic, consistent, and long-term fashion the American public to explain (probably in a fairly dumbed-down fashion, but explained nonetheless) the roots of what happened, why the next few years were going to be tough, but how it would be essential for us to hunker down as a nation and get through this, having learned our lessons.

Now, in the above scenario, the equity markets would have probably kept suffering, even after a dead-cat bounce in 2009. They would have ground lower and lower,
perhaps bottoming at 5,000 on the Dow. But, oh, around about now, a base would start forming, and by 2016, the healing would be firmly in place. We’d probably start a new era of real, honest growth and strength.

But back to reality: none of this happened, and little of it had a real chance of happening. Instead, we have completely papered over the problem, performing the equivalent of covering a cancer patient with band-aids. The upper crust have gotten to enjoy six solid years of a faux prosperity, thanks to their buddies at the Fed, and the cataclysm that will unfold will someday finally be understood as having been utterly preventable.

So let’s all get ready for Yellen to continue this little farcical nightmare in which we’re all living. There will come a day when the markets stop respecting the little lady and her printing press. Whether that day of reckoning is this week or years from now remains to be seen, but at this point, we can really only conclude this: the bad guys completely got away with it, and America as a whole has been played the fool.

via Zero Hedge http://ift.tt/1yeuNwv Tim Knight from Slope of Hope

What’s The “Best” Way To Make A 10% Return?

Aside from the “sure thing” of buying the Alibaba IPO, achieving a 10% yield return in the new normal world requires leverage and excess risk-taking. To compare the risk/reward of various assets, Citi accounts for haircuts and leverage costs of the typical investor and finds an investors needs a 1.9x leverage in the S&P 500, 8.1x leverage in Treasuries, and 2.3x leverage in high-yield to achieve (based on historical norms) the required return. However, after accounting for downside risks, high-yield cash and leveraged loans both top the S&P 500 as the best way to meet a 10& bogey return.

To achieve a 10% yield bogey, you need leverage…