another site
Presented with little comment aside to ask (rhetorically of course) how
much longer the crushed consumer can subsist on a diet of increasingly saturated credit and dwindled-savings before retail sales revert to reality…
h/t @Not_Jim_Cramer
via Zero Hedge http://ift.tt/1m1pzf1 Tyler Durden
Presented with little comment aside to ask (rhetorically of course) how
much longer the crushed consumer can subsist on a diet of increasingly saturated credit and dwindled-savings before retail sales revert to reality…
h/t @Not_Jim_Cramer
via Zero Hedge http://ift.tt/1m1pzf1 Tyler Durden
This should be good… just don’t mention the bridge (and with any luck this won’t last as long as the press conference)
click image for NBC live stream
via Zero Hedge http://ift.tt/1m1puYX Tyler Durden
This should be good… just don’t mention the bridge (and with any luck this won’t last as long as the press conference)
click image for NBC live stream
via Zero Hedge http://ift.tt/1m1puYX Tyler Durden
Submitted by David Howden via the Ludwig von Mises Institute of Canada,
Tax burdens are so high that it might not be possible to pay off the high levels of indebtedness in most of the Western world. At least, that is the conclusion of a new IMF paper from Carmen Reinhart and Kenneth Rogoff.
Reinhart and Rogoff gained recent fame for their book “This Time It’s Different”, in which they argued that high levels of public debt have historically been associated with reduced growth opportunities.
As they now note, “The size of the problem suggests that restructurings will be needed, for example, in the periphery of Europe, far beyond anything discussed in public to this point.” Up to this point in the Eurocrisis the primary tools used to rescue profligate countries have included increased taxes, EU and IMF bailouts, and haircuts on government debt.
These bailouts have largely exacerbated the debt problems that existed five short years ago. Indeed, as Reinhart and Rogoff well note, the once fiscally sound North of Europe is now increasingly unable to continue shouldering the debts of its Southern neighbours.
General government debt (% GDP)
Source: Eurostat (2012)
Six European countries currently have a government debt to GDP ratio – a metric popularlised by Reinhart and Rogoff to signal reduced growth prospects – of over 90%. Countries that were relatively debt-free just five short years ago are now encumbered by the debt repayments necessitated by bailouts. Ireland is a case in point – as recently as 2007 its government debt to GDP ratio was below 25%. Six years later that figure stands north of 120%! “Fiscally secure” Scandinavia should keep in mind that fortunes can change quickly, as happened to the luck of the Irish.
The debt crisis to date has been mitigated in large part by tax increases and transfers from the wealthy “core” of Europe to the periphery. The problem with tax increases is that they cannot continue unabated.
Total government tax revenue (% GDP)
Source: Eurostat (2012)
Already in Europe there are seven countries where tax revenues are greater than 48% of GDP. There once was a time when only Scandinavia was chided for its high tax regimes and large public sectors. Today both Austria and France have more than half of their economies involved in the public sector and financed through taxes. (Note also that as they both run government budget deficits the actual size of their governments is greater yet.)
With high unemployment in Europe (and especially in its periphery), governments cannot raise much revenue by raising taxes – who would pay it? With already high levels of debt it is questionable how much revenue can be raised by further debt issuances, at least without increasing interest rates and imperiling already fragile government finances with higher interest charges.
Instead, Reinhart and Rogoff see two facts of life for Europe’s future: financial repression through higher inflation rates and taxes levied on savings and wealth. This time is no different than other cases of highly indebted countries in Europe’s history – just look to the post-War examples as similar cases in point. Don’t say you haven’t been warned.
via Zero Hedge http://ift.tt/1alWHJv Tyler Durden
Just when you thought US foreign policy under John Kerry couldn’t plumb new lows, here comes Israel, mocking… John Kerry.
Yaalon quoted by “Yediot Aharonot” saying: only thing that could “save” #Israel is for Kerry to win Nobel Peace Prize and “leave us alone.”
— Richard Engel (@RichardEngel) January 14, 2014
But it wasn’t Israel’s mocking of Kerry that was embarrassing: after Syria, Israel is hardly a big fan of Hillary’s replacement who brought the Middle East to the verge of a YouTube clip fabricated war, and then promptly slank back to his yacht. It was the spirited White House defense. To wit from Reuters:
The White House on Tuesday denounced reported comments by Israel’s defense minister that were sharply critical of U.S. Secretary of State John Kerry.
White House spokesman Jay Carney responded to reports that Israeli military Moshe Yaalon said Kerry’s pursuit of Middle East peace is out of an “incomprehensible obsession and a messianic feeling.”
“To question Secretary Kerry’s motives and distort his proposals is not something we would expect from the defense minister of a close ally,” Carney said.
Well, dear “Jay”, while the US is stuck manipulating the stock market in its 5th year of attempting to trickle down the wealth effect, and defending Obama’s disastrous insurance ponzi scheme legacy, China (and increasingly Russia) are dividing up the world among them: from Africa, to Syria, to everywhere else, all the while soaking up all the gold that is not nailed down. So by all means – be prepared for more surprises.
As for Kerry’s “messianic feeling” – was anyone actually surprised?
via Zero Hedge http://ift.tt/1alOJQE Tyler Durden
Poor Uber: the limo company has had its share of tribulations in the US over the past month, being accused periodically of price gouging when it implemented surge pricing during times of peak demand and lack of alternatives (and a very confused consumer, who naturally has the option of not paying the surge price if they feel insulted by it). However, this is nothing compared to the treatment the company that is a manifestation of pure capitalism at its rawest received in socialist France yesterday.
As Rudebaguette reported previously, a French taxi drivers strike turned ugly for none other than an Uber driver who was carrying Eventbrite CTO Renaud Visage & Kat Borlongan from the airport to Paris, when “he was attacked by multiple assailants, who allegedly, after smashing one window and slashing two tires (as seen in the photo), as well as defacing one side of the car with glue, attempted to enter the vehicle. Borlongan says their Uber driver manoeuvered the two out of the situation before anything could happen, leaving the three stranded on the shoulder of the freeway.”
This is what Kat Borlongan tweeted shortly after the incident:
Got attacked in an @uber by cab drivers on strike near Paris airport: smashed windows, flat tires, vandalized vehicle and bleeding hands.
— Kat Borlongan (@KatBorlongan) January 13, 2014
And while strikes in socialist France are a daily thing, this one was different:
Taxi drivers today are protesting against the likes of Uber, and against what they consider to be a government that refuses to see things their way, according to an official press release. The only problem is that this protest comes less than a month after the French government caved in to the Taxi union demands to enforce the 15-minute law, not just for new users, as was originally intended, but for all users of Chauffeur apps.
It’s a question of credibility, according to Le Figaro’s Yann La Galès, who thinks the Taxis are looking to have their cake and protest the lack of the aforementioned cake, too.
Meanwhile, one Chauffeur App startup, Allocab, says it won’t take the protest, or the 15-minute law, lying down. According to Frenchweb, the startup is already pushing legal action through against the 15-minute law – we spoke last week about how the “law,” which actually is a Presidential decree, not voted on by the legistlative body, may be ruled invalid, due to the fact that decrees cannot take affect if they change the balance of competition – I think that’s an easy argument to make.
Shortly thereafter, Uber’s GM of France Pieter-Dimitry Gore-Coty had this comment:
“Uber strongly condemns this morning’s incident where two of our users and our driver were confronted with severe violence.
First, we are very glad all involved are safe and ok. Also, we would like to praise our partner who has shown great courage and professionalism, who focused on getting his customers out of a very challenging situation.
That the taxis chose to use violence is unacceptable, that they chose to strike is their business. However, Parisians also have a choice when it comes to moving around in their cities, and today’s incident will certainly not tempt Parisians into choosing a taxi for their next ride. Safety, reliability and choice, not violence, are what continues to draw customers towards VTCs.”
And some more recent updates from the French socialist vs capitalist taxi battleground:
So there you have it dear Uber: no matter how bad you think you may have it in the US, there is always France. Because sometimes socialism and capitalism just don’t mix…
via Zero Hedge http://ift.tt/1hnC5CN Tyler Durden
Poor Uber: the limo company has had its share of tribulations in the US over the past month, being accused periodically of price gouging when it implemented surge pricing during times of peak demand and lack of alternatives (and a very confused consumer, who naturally has the option of not paying the surge price if they feel insulted by it). However, this is nothing compared to the treatment the company that is a manifestation of pure capitalism at its rawest received in socialist France yesterday.
As Rudebaguette reported previously, a French taxi drivers strike turned ugly for none other than an Uber driver who was carrying Eventbrite CTO Renaud Visage & Kat Borlongan from the airport to Paris, when “he was attacked by multiple assailants, who allegedly, after smashing one window and slashing two tires (as seen in the photo), as well as defacing one side of the car with glue, attempted to enter the vehicle. Borlongan says their Uber driver manoeuvered the two out of the situation before anything could happen, leaving the three stranded on the shoulder of the freeway.”
This is what Kat Borlongan tweeted shortly after the incident:
Got attacked in an @uber by cab drivers on strike near Paris airport: smashed windows, flat tires, vandalized vehicle and bleeding hands.
— Kat Borlongan (@KatBorlongan) January 13, 2014
And while strikes in socialist France are a daily thing, this one was different:
Taxi drivers today are protesting against the likes of Uber, and against what they consider to be a government that refuses to see things their way, according to an official press release. The only problem is that this protest comes less than a month after the French government caved in to the Taxi union demands to enforce the 15-minute law, not just for new users, as was originally intended, but for all users of Chauffeur apps.
It’s a question of credibility, according to Le Figaro’s Yann La Galès, who thinks the Taxis are looking to have their cake and protest the lack of the aforementioned cake, too.
Meanwhile, one Chauffeur App startup, Allocab, says it won’t take the protest, or the 15-minute law, lying down. According to Frenchweb, the startup is already pushing legal action through against the 15-minute law – we spoke last week about how the “law,” which actually is a Presidential decree, not voted on by the legistlative body, may be ruled invalid, due to the fact that decrees cannot take affect if they change the balance of competition – I think that’s an easy argument to make.
Shortly thereafter, Uber’s GM of France Pieter-Dimitry Gore-Coty had this comment:
“Uber strongly condemns this morning’s incident where two of our users and our driver were confronted with severe violence.
First, we are very glad all involved are safe and ok. Also, we would like to praise our partner who has shown great courage and professionalism, who focused on getting his customers out of a very challenging situation.
That the taxis chose to use violence is unacceptable, that they chose to strike is their business. However, Parisians also have a choice when it comes to moving around in their cities, and today’s incident will certainly not tempt Parisians into choosing a taxi for their next ride. Safety, reliability and choice, not violence, are what continues to draw customers towards VTCs.”
And some more recent updates from the French socialist vs capitalist taxi battleground:
So there you have it dear Uber: no matter how bad you think you may have it in the US, there is always France. Because sometimes socialism and capitalism just don’t mix…
via Zero Hedge http://ift.tt/1hnC5CN Tyler Durden
"Continuing large-scale asset purchases risks placing us in an untenable position, both from the standpoint of unreasonably inflating the stock, bond and other tradable asset markets and from the perspective of complicating the future conduct of monetary policy," warns the admittedly-hawkish Dallas Fed head. Fisher goes on to confirm Peter Boockvar's "QE puts beer goggles on investors," analogy adding that while he is "not among those who think we are presently in a 'bubble' mode for stocks or bonds; he is reminded of William McChesney Martin comments – the longest-serving Fed chair – "markets for anything tradable overshoot and one must be prepared for adjustments that bring markets back to normal valuations."
Via Dallas Fed President Richard Fisher
Beer Goggles, Monetary Camels, the Eye of the Needle and the First Law of Holes
During the holiday break, I spent a good deal of time trying to organize my thoughts on how I will approach monetary policy going forward. Today, I am going to share some of those thoughts that might be of interest to you as corporate directors.
At the last meeting of the Federal Open Market Committee (FOMC), it was decided that the amount of Treasuries and mortgage-backed securities (MBS) we have been purchasing should each be pared back by $5 billion, so that we would be purchasing a total of $75 billion a month (in addition to reinvesting the proceeds of maturing issues we hold) rather than $85 billion per month. In addition, it was noted that “if incoming information broadly supports the Committee’s expectation(s) … the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.” And it was made clear that the FOMC expects it will hold the base rate that anchors the yield curve—the federal funds rate, or the rate on overnight money—to its present near-zero rate well past the time when unemployment is reduced to 6½ percent.
I was pleased with the decision to finally begin tapering our bond purchases, though I would have preferred to pull back our purchases by double the announced amount. But the important thing for me is that the committee began the process of slowing down the ballooning of our balance sheet, which at year-end exceeded $4 trillion. And we began—and I use that word deliberately, for we have more to do on this front—to clarify our intentions for managing the overnight money rate.
As an economist would say, “on net” I was rather pleased with the decision taken at the December FOMC meeting.
Under the chairmanship of Ben Bernanke, all 12 Federal Reserve Bank presidents, together with the sitting governors of the Federal Reserve Board, have input into the decision-making process. There is a formal vote—regardless of who is the Fed chair—that includes only five of the 12 regional Bank presidents plus the governors, but all of the principals seated at the table participate fully in the discussion of what to do. And yet, either because we will effect a change in the chairmanship starting in February or because at the last meeting we took the step of tapering back by a small amount our massive purchase of Treasuries and MBS, great attention is being placed on the voters for 2014, of which I am one.
Two comments I recently read have been buzzing around my mind as I think about the many issues that will condition my actions as a voter.
The first was by Peter Boockvar, who is among the plethora of analysts offering different viewpoints that I regularly read to get a sense of how we are being viewed in the marketplace. Here is a rather pungent quote from a note he sent out on Jan. 2:
“…QE [quantitative easing] puts beer goggles on investors by creating a line of sight where everything looks good…”
For those of you unfamiliar with the term “beer goggles,” the Urban Dictionary defines it as “the effect that alcohol … has in rendering a person who one would ordinarily regard as unattractive as … alluring.” This audience might substitute “wine” or “martini” or “margarita” for “beer” to make it more age-appropriate, but the effect is the same: Things often look better when one is under the influence of free-flowing liquidity. This is one reason why William McChesney Martin, the longest-serving Fed chairman in our institution’s 100-year history, famously said that the Fed’s job is to take away the punchbowl just as the party gets going.[2]
The other eye catcher for me was a cartoon in the Jan. 6 issue of The New Yorker. Sitting in a room are two businessmen who are apparently conversant with the New Testament’s book of Matthew. One says to the other, “We need either bigger needles or smaller camels.”
Today, I want to muse aloud about whether QE has indeed put beer goggles on investors and whether we, the Fed, can pass the camel of massive quantitative easing through the eye of the needle of normalizing monetary policy without creating havoc.
Boockvar is right. When money available to investors is close to free and is widely available, and there is a presumption that the central bank will keep it that way indefinitely, discount rates applied to assessing the value of future cash flows shift downward, making for lower hurdle rates for valuations. A bull market for stocks and other claims on tradable companies ensues; the financial world looks rather comely.
Market operators donning beer goggles and even some sober economists consider analysts like Boockvar party poopers. But I have found myself making arguments similar to his and to those of other skeptics at recent FOMC meetings, pointing to some developments that signal we have made for an intoxicating brew as we have continued pouring liquidity down the economy’s throat.
Among them:
And then there are the knock-on effects of all of the above. Market operators are once again spending money freely outside of their day jobs. An example: For almost 40 years, I have spent a not insignificant portion of my savings collecting rare, first-edition books. Like any patient investor in any market, I have learned through several market cycles that you buy when nobody wants something and sell when everyone clamors for more. During the financial debacle of 2007–09, I was able to buy for a song volumes I have long coveted (including a mint-condition first printing from 1841 of Mackay’s Memoirs of Extraordinary Popular Delusions, which every one of you should read and re-read, certainly if you are contemplating seeing the movie The Wolf of Wall Street). Today, I could not afford them. First editions, like paintings, sculptures, fine wines, Bugattis and homes in Highland Park or River Oaks, have become the by-product of what I am sure Bill Martin would consider a party well underway.
I want to make clear that I am not among those who think we are presently in a “bubble” mode for stocks or bonds or most other assets. But this much I know: Just as Martin knew by virtue of his background as a noneconomist who had hands-on Wall Street experience, markets for anything tradable overshoot and one must be prepared for adjustments that bring markets back to normal valuations.
This need not threaten the real economy. The “slow correction” of 1962 comes to mind as an example: A stock market correction took place, and yet the economy continued to fare well.
Here is the point as to the market’s beer goggles. Were a stock market correction to ensue while I have the vote, I would not flinch from supporting continued reductions in the size of our asset purchases as long as the real economy is growing, cyclical unemployment is declining and demand-driven deflation remains a small tail risk; I would vote for continued reductions in our asset purchases, with an eye toward eliminating them entirely at the earliest practicable date.
Let’s turn to the camel, by which I mean the size of the Fed’s balance sheet.
A little history provides some perspective. We began to grow our balance sheet as we approached year-end 2008. On Sept. 10, 2008, the amount of Reserve Bank credit outstanding was $867 billion. On Nov. 25, 2008, we announced a program to purchase $100 billion of securities issued by the housing-related government-sponsored enterprises, together with our intent to purchase up to $500 billion in MBS in order to goose the housing market. I supported these initiatives, recognizing that the economy was in the throes of a financial panic.
Following our December 2008 meeting, the FOMC announced that it had cut the target range for the fed funds rate to 0-to-1/4 of 1 percent, and being thus “zero bound,” we floated the idea of purchasing longer-term Treasuries in order to provide further monetary accommodation (when we buy Treasuries or MBS and agency debt, we put money into the financial system, substituting for further interest rate cuts). On March 18, 2009, we announced additional purchases of up to $750 billion of agency MBS and up to $100 billion of agency debt, plus purchases of up to $300 billion of longer-term Treasury securities over six months. That day, our balance sheet was marked at $2 trillion.
There are some details that impacted our balance sheet, which I have omitted so as not to bore you or entangle you in the entrails of central bank operations: For example, liquidity swaps with other central banks declined from a peak occasioned by the financial crisis of $583 billion the week ended Dec. 10, 2008, to $330 billion the following March, thus somewhat mitigating the growth of our balance sheet over that period.[3]
From my perch, I considered a balance sheet of $2-plus trillion and a base lending rate of 0-to-1/4 of 1 percent more than sufficient to stimulate not just the housing market but the stock market, too, thus placing us on the path of what economists refer to as “the wealth effect”—the working assumption that rising prices for homes, stocks and bonds floats the income boat of all Americans.
I basically said so publicly on March 26, 2009, in a speech to the RISE Forum, an annual student investment conference. At the time, the S&P 500 was priced at 814, the Nasdaq at 1,529 and the Dow at 7,750. The mindset of investors at that moment was summarized at an earlier FOMC meeting by one of my most esteemed colleagues at the Fed, who quipped that in looking at the balance sheets of most financial institutions, “nothing on the right is right and nothing on the left is left.” As I looked at the faces of the students gathered in that vast auditorium, I could see in their eyes a reflection of the gloom and doom of the time.
Here is what I told these young investors that dark morning: “… the current economic and financial predicament represents a potential gold mine rather than a minefield. Historically, great investors have made their money by climbing a wall of worry rather than letting a woeful consensus cow them. … Your job as investors is … to ferret out from the general-market malaise good financial and business operators whose franchises and prospects are overdiscounted at current prices. Were I you … I would be licking my chops at the opportunities that always abound in times of adversity. … There are a lot of dollar bills that can be found in the debris of the current markets that can be picked up for nickels and dimes.”
Of course, I would not mention this today had I been wrong! Currently, the right hand side of the balance sheet of most any well-managed market-traded business is chock-full of restructured, cheap debt and leaner common stock, while the left side is bulging with surplus cash. The S&P closed yesterday at 1,819, the Nasdaq at 4,113 and the Dow at 16,258—a plateau over two times above the valley into which they had descended in 2009.
And, again, there are the signs of conspicuous consumption I mentioned earlier that reflect a fully robust stock market. If there is indeed a wealth effect that spreads from clever market operators to the working people of America, a $2 trillion balance sheet might well have been sufficient to have performed the trick.
The FOMC is a committee, however, and the majority of my colleagues have disagreed with me on this point. We have since doubled our balance sheet to $4 trillion. This has resulted not only in saltatory[4] housing, bond and stock markets, but a real economy that is on the mend, with cyclical unemployment declining and inflation thus far held at bay.
Here is the rub. We have accomplished the last $2 trillion of balance-sheet expansion by purchasing unprecedented amounts of longer-maturity assets: As of Jan. 8, 2014, 75 percent of Federal Reserve-held loans and securities had remaining maturities in excess of five years.
The brow begins to furrow. To be sure, Treasury and MBS markets are liquid markets. But the old market operator in me is conscious that we hold nearly 40 percent of outstanding eligibl
e MBS and of Treasuries with more than five years to maturity. Selling that concentrated an amount of even the most presumably liquid assets would be a heck of lot more complicated than accumulating it.
Currently, this is not an issue. But as the economy grows, the massive amount of money sitting on the sidelines will be activated; the “velocity” of money will accelerate. If it does so too quickly, we might create inflation or financial market instability or both.
The 12 Federal Reserve Banks house the excess reserves of the depository institutions of America: If loan demand fails to grow at the same rate as banks accumulate reserves due to our hyperaccommodative monetary policy, the resultant excess reserves are deposited with us at a rate of return of 25 basis points (1/4 of 1 percent per annum).
Here is some math confronting policymakers: Excess reserves are currently 65 percent of the monetary base and rising. The only other time excess reserves as a percentage of the base have come anywhere close to this level was at the close of the 1930s, when the ratio hit 41 percent. We are in uncharted territory.
To prevent excess reserves from fueling a too-rapid expansion of bank lending in an expanding economy, the Fed will need to either drain reserves on a large scale by selling longer-term assets at a loss or provide inducements to banks to keep reserves idle, by offering interest on excess reserves at a rate competitive with what banks might earn on loans to businesses and consumers. Or we might employ more widely new techniques we are currently testing, such as “reverse repos,” complex transactions in which we, in effect, borrow cash overnight from market operators while posting securities as collateral.
Such inducements to control the velocity of the monetary base might expose the Fed to intense scrutiny and criticism. The big banks that park the lion’s share of excess reserves with us are hardly the darlings of public sentiment. Raising interest payments to them while scaling back our remittances to the Treasury might raise a few congressional eyebrows. And as to our repo operations, we have never implemented them on anywhere near the scale envisioned.
Of greatest concern to me is that the risk of scrutiny and criticism might hinder policymakers from acting quickly enough to remove or dampen the dry inflationary tinder that is inherent in the massive, but currently fallow, monetary base.
In the parlance of central banking, the “exit” challenge we now face is somewhat daunting: How do we pass a camel fattened by trillions of dollars of longer-term, less-liquid purchases through the eye of the needle of getting back to a “normalized” balance sheet so as to keep inflation under wraps and yet provide the right amount of monetary impetus for the economy to keep growing and expanding?
I have great faith in the integrity and brainpower of my fellow policymakers. I am confident that the 19 earnest women and men that make up the FOMC will do their level best under Chairwoman Janet Yellen’s leadership to accomplish a smooth exit that keeps prices stable and the economy in a job-creating mode. But my confidence will be bolstered if my colleagues adopt the First Law of Holes espoused in the late ’70s by then-British Chancellor of the Exchequer Denis Healey: “If you find yourself in a hole, stop digging.”
The housing market is well along in repair;[5] the economy is expanding; cyclical unemployment is declining. To be sure, there will be individual data points that appear to challenge confidence, like the just-released employment report for December. But I believe the odds favor continued economic progress. And I believe that continuing large-scale asset purchases risks placing us in an untenable position, both from the standpoint of unreasonably inflating the stock, bond and other tradable asset markets and from the perspective of complicating the future conduct of monetary policy.
The eye of the needle of pulling off a clean exit is narrow; the camel is already too fat. As soon as feasible, we should change tack. We should stop digging. I plan to cast my votes at FOMC meetings accordingly.
via Zero Hedge http://ift.tt/1j5Z7AZ Tyler Durden
"Continuing large-scale asset purchases risks placing us in an untenable position, both from the standpoint of unreasonably inflating the stock, bond and other tradable asset markets and from the perspective of complicating the future conduct of monetary policy," warns the admittedly-hawkish Dallas Fed head. Fisher goes on to confirm Peter Boockvar's "QE puts beer goggles on investors," analogy adding that while he is "not among those who think we are presently in a 'bubble' mode for stocks or bonds; he is reminded of William McChesney Martin comments – the longest-serving Fed chair – "markets for anything tradable overshoot and one must be prepared for adjustments that bring markets back to normal valuations."
Via Dallas Fed President Richard Fisher
Beer Goggles, Monetary Camels, the Eye of the Needle and the First Law of Holes
During the holiday break, I spent a good deal of time trying to organize my thoughts on how I will approach monetary policy going forward. Today, I am going to share some of those thoughts that might be of interest to you as corporate directors.
At the last meeting of the Federal Open Market Committee (FOMC), it was decided that the amount of Treasuries and mortgage-backed securities (MBS) we have been purchasing should each be pared back by $5 billion, so that we would be purchasing a total of $75 billion a month (in addition to reinvesting the proceeds of maturing issues we hold) rather than $85 billion per month. In addition, it was noted that “if incoming information broadly supports the Committee’s expectation(s) … the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.” And it was made clear that the FOMC expects it will hold the base rate that anchors the yield curve—the federal funds rate, or the rate on overnight money—to its present near-zero rate well past the time when unemployment is reduced to 6½ percent.
I was pleased with the decision to finally begin tapering our bond purchases, though I would have preferred to pull back our purchases by double the announced amount. But the important thing for me is that the committee began the process of slowing down the ballooning of our balance sheet, which at year-end exceeded $4 trillion. And we began—and I use that word deliberately, for we have more to do on this front—to clarify our intentions for managing the overnight money rate.
As an economist would say, “on net” I was rather pleased with the decision taken at the December FOMC meeting.
Under the chairmanship of Ben Bernanke, all 12 Federal Reserve Bank presidents, together with the sitting governors of the Federal Reserve Board, have input into the decision-making process. There is a formal vote—regardless of who is the Fed chair—that includes only five of the 12 regional Bank presidents plus the governors, but all of the principals seated at the table participate fully in the discussion of what to do. And yet, either because we will effect a change in the chairmanship starting in February or because at the last meeting we took the step of tapering back by a small amount our massive purchase of Treasuries and MBS, great attention is being placed on the voters for 2014, of which I am one.
Two comments I recently read have been buzzing around my mind as I think about the many issues that will condition my actions as a voter.
The first was by Peter Boockvar, who is among the plethora of analysts offering different viewpoints that I regularly read to get a sense of how we are being viewed in the marketplace. Here is a rather pungent quote from a note he sent out on Jan. 2:
“…QE [quantitative easing] puts beer goggles on investors by creating a line of sight where everything looks good…”
For those of you unfamiliar with the term “beer goggles,” the Urban Dictionary defines it as “the effect that alcohol … has in rendering a person who one would ordinarily regard as unattractive as … alluring.” This audience might substitute “wine” or “martini” or “margarita” for “beer” to make it more age-appropriate, but the effect is the same: Things often look better when one is under the influence of free-flowing liquidity. This is one reason why William McChesney Martin, the longest-serving Fed chairman in our institution’s 100-year history, famously said that the Fed’s job is to take away the punchbowl just as the party gets going.[2]
The other eye catcher for me was a cartoon in the Jan. 6 issue of The New Yorker. Sitting in a room are two businessmen who are apparently conversant with the New Testament’s book of Matthew. One says to the other, “We need either bigger needles or smaller camels.”
Today, I want to muse aloud about whether QE has indeed put beer goggles on investors and whether we, the Fed, can pass the camel of massive quantitative easing through the eye of the needle of normalizing monetary policy without creating havoc.
Boockvar is right. When money available to investors is close to free and is widely available, and there is a presumption that the central bank will keep it that way indefinitely, discount rates applied to assessing the value of future cash flows shift downward, making for lower hurdle rates for valuations. A bull market for stocks and other claims on tradable companies ensues; the financial world looks rather comely.
Market operators donning beer goggles and even some sober economists consider analysts like Boockvar party poopers. But I have found myself making arguments similar to his and to those of other skeptics at recent FOMC meetings, pointing to some developments that signal we have made for an intoxicating brew as we have continued pouring liquidity down the economy’s throat.
Among them:
And then there are the knock-on effects of all of the above. Market operators are once again spending money freely outside of their day jobs. An example: For almost 40 years, I have spent a not insignificant portion of my savings collecting rare, first-edition books. Like any patient investor in any market, I have learned through several market cycles that you buy when nobody wants something and sell when everyone clamors for more. During the financial debacle of 2007–09, I was able to buy for a song volumes I have long coveted (including a mint-condition first printing from 1841 of Mackay’s Memoirs of Extraordinary Popular Delusions, which every one of you should read and re-read, certainly if you are contemplating seeing the movie The Wolf of Wall Street). Today, I could not afford them. First editions, like paintings, sculptures, fine wines, Bugattis and homes in Highland Park or River Oaks, have become the by-product of what I am sure Bill Martin would consider a party well underway.
I want to make clear that I am not among those who think we are presently in a “bubble” mode for stocks or bonds or most other assets. But this much I know: Just as Martin knew by virtue of his background as a noneconomist who had hands-on Wall Street experience, markets for anything tradable overshoot and one must be prepared for adjustments that bring markets back to normal valuations.
This need not threaten the real economy. The “slow correction” of 1962 comes to mind as an example: A stock market correction took place, and yet the economy continued to fare well.
Here is the point as to the market’s beer goggles. Were a stock market correction to ensue while I have the vote, I would not flinch from supporting continued reductions in the size of our asset purchases as long as the real economy is growing, cyclical unemployment is declining and demand-driven deflation remains a small tail risk; I would vote for continued reductions in our asset purchases, with an eye toward eliminating them entirely at the earliest practicable date.
Let’s turn to the camel, by which I mean the size of the Fed’s balance sheet.
A little history provides some perspective. We began to grow our balance sheet as we approached year-end 2008. On Sept. 10, 2008, the amount of Reserve Bank credit outstanding was $867 billion. On Nov. 25, 2008, we announced a program to purchase $100 billion of securities issued by the housing-related government-sponsored enterprises, together with our intent to purchase up to $500 billion in MBS in order to goose the housing market. I supported these initiatives, recognizing that the economy was in the throes of a financial panic.
Following our December 2008 meeting, the FOMC announced that it had cut the target range for the fed funds rate to 0-to-1/4 of 1 percent, and being thus “zero bound,” we floated the idea of purchasing longer-term Treasuries in order to provide further monetary accommodation (when we buy Treasuries or MBS and agency debt, we put money into the financial system, substituting for further interest rate cuts). On March 18, 2009, we announced additional purchases of up to $750 billion of agency MBS and up to $100 billion of agency debt, plus purchases of up to $300 billion of longer-term Treasury securities over six months. That day, our balance sheet was marked at $2 trillion.
There are some details that impacted our balance sheet, which I have omitted so as not to bore you or entangle you in the entrails of central bank operations: For example, liquidity swaps with other central banks declined from a peak occasioned by the financial crisis of $583 billion the week ended Dec. 10, 2008, to $330 billion the following March, thus somewhat mitigating the growth of our balance sheet over that period.[3]
From my perch, I considered a balance sheet of $2-plus trillion and a base lending rate of 0-to-1/4 of 1 percent more than sufficient to stimulate not just the housing market but the stock market, too, thus placing us on the path of what economists refer to as “the wealth effect”—the working assumption that rising prices for homes, stocks and bonds floats the income boat of all Americans.
I basically said so publicly on March 26, 2009, in a speech to the RISE Forum, an annual student investment conference. At the time, the S&P 500 was priced at 814, the Nasdaq at 1,529 and the Dow at 7,750. The mindset of investors at that moment was summarized at an earlier FOMC meeting by one of my most esteemed colleagues at the Fed, who quipped that in looking at the balance sheets of most financial institutions, “nothing on the right is right and nothing on the left is left.” As I looked at the faces of the students gathered in that vast auditorium, I could see in their eyes a reflection of the gloom and doom of the time.
Here is what I told these young investors that dark morning: “… the current economic and financial predicament represents a potential gold mine rather than a minefield. Historically, great investors have made their money by climbing a wall of worry rather than letting a woeful consensus cow them. … Your job as investors is … to ferret out from the general-market malaise good financial and business operators whose franchises and prospects are overdiscounted at current prices. Were I you … I would be licking my chops at the opportunities that always abound in times of adversity. … There are a lot of dollar bills that can be found in the debris of the current markets that can be picked up for nickels and dimes.”
Of course, I would not mention this today had I been wrong! Currently, the right hand side of the balance sheet of most any well-managed market-traded business is chock-full of restructured, cheap debt and leaner common stock, while the left side is bulging with surplus cash. The S&P closed yesterday at 1,819, the Nasdaq at 4,113 and the Dow at 16,258—a plateau over two times above the valley into which they had descended in 2009.
And, again, there are the signs of conspicuous consumption I mentioned earlier that reflect a fully robust stock market. If there is indeed a wealth effect that spreads from clever market operators to the working people of America, a $2 trillion balance sheet might well have been sufficient to have performed the trick.
The FOMC is a committee, however, and the majority of my colleagues have disagreed with me on this point. We have since doubled our balance sheet to $4 trillion. This has resulted not only in saltatory[4] housing, bond and stock markets, but a real economy that is on the mend, with cyclical unemployment declining and inflation thus far held at bay.
Here is the rub. We have accomplished the last $2 trillion of balance-sheet expansion by purchasing unprecedented amounts of longer-maturity assets: As of Jan. 8, 2014, 75 percent of Federal Reserve-held loans and securities had remaining maturities in excess of five years.
The brow begins to furrow. To be sure, Treasury and MBS markets are liquid markets. But the old market operator in me is conscious that we hold nearly 40 percent of outstanding eligible MBS and of Treasuries with more than five years to maturity. Selling that concentrated an amount of even the most presumably liquid assets would be a heck of lot more complicated than accumulating it.
Currently, this is not an issue. But as the economy grows, the massive amount of money sitting on the sidelines will be activated; the “velocity” of money will accelerate. If it does so too quickly, we might create inflation or financial market instability or both.
The 12 Federal Reserve Banks house the excess reserves of the depository institutions of America: If loan demand fails to grow at the same rate as banks accumulate reserves due to our hyperaccommodative monetary policy, the resultant excess reserves are deposited with us at a rate of return of 25 basis points (1/4 of 1 percent per annum).
Here is some math confronting policymakers: Excess reserves are currently 65 percent of the monetary base and rising. The only other time excess reserves as a percentage of the base have come anywhere close to this level was at the close of the 1930s, when the ratio hit 41 percent. We are in uncharted territory.
To prevent excess reserves from fueling a too-rapid expansion of bank lending in an expanding economy, the Fed will need to either drain reserves on a large scale by selling longer-term assets at a loss or provide inducements to banks to keep reserves idle, by offering interest on excess reserves at a rate competitive with what banks might earn on loans to businesses and consumers. Or we might employ more widely new techniques we are currently testing, such as “reverse repos,” complex transactions in which we, in effect, borrow cash overnight from market operators while posting securities as collateral.
Such inducements to control the velocity of the monetary base might expose the Fed to intense scrutiny and criticism. The big banks that park the lion’s share of excess reserves with us are hardly the darlings of public sentiment. Raising interest payments to them while scaling back our remittances to the Treasury might raise a few congressional eyebrows. And as to our repo operations, we have never implemented them on anywhere near the scale envisioned.
Of greatest concern to me is that the risk of scrutiny and criticism might hinder policymakers from acting quickly enough to remove or dampen the dry inflationary tinder that is inherent in the massive, but currently fallow, monetary base.
In the parlance of central banking, the “exit” challenge we now face is somewhat daunting: How do we pass a camel fattened by trillions of dollars of longer-term, less-liquid purchases through the eye of the needle of getting back to a “normalized” balance sheet so as to keep inflation under wraps and yet provide the right amount of monetary impetus for the economy to keep growing and expanding?
I have great faith in the integrity and brainpower of my fellow policymakers. I am confident that the 19 earnest women and men that make up the FOMC will do their level best under Chairwoman Janet Yellen’s leadership to accomplish a smooth exit that keeps prices stable and the economy in a job-creating mode. But my confidence will be bolstered if my colleagues adopt the First Law of Holes espoused in the late ’70s by then-British Chancellor of the Exchequer Denis Healey: “If you find yourself in a hole, stop digging.”
The housing market is well along in repair;[5] the economy is expanding; cyclical unemployment is declining. To be sure, there will be individual data points that appear to challenge confidence, like the just-released employment report for December. But I believe the odds favor continued economic progress. And I believe that continuing large-scale asset purchases risks placing us in an untenable position, both from the standpoint of unreasonably inflating the stock, bond and other tradable asset markets and from the perspective of complicating the future conduct of monetary policy.
The eye of the needle of pulling off a clean exit is narrow; the camel is already too fat. As soon as feasible, we should change tack. We should stop digging. I plan to cast my votes at FOMC meetings accordingly.
via Zero Hedge http://ift.tt/1j5Z7AZ Tyler Durden