Posted by Ray on August 25, 2009 under Main, The Federal Reserve | 
The markets and economists are thrilled with the reappointment of Ben, but is this just another case of irrational exuberance? I think so. His policies are too similar to Greenspan and he made some very horrible mistakes which will eventually cost us. However, I will concede he did do some things right and because of this I think you can make a case of or against Ben being our Fed Chariman. However, the one thing that bothered me about Obama’s speech today was his consistent reference to an independent Fed, more on that later.
What Ben did wrong
Starting in 2003 Ben had been a strong supporter of cheap money and endorsed Greenspan’s policies, which earned Ben the nickname Helicopter Ben. There is no way anyone, who takes a rational look at the policies of the Federal Reserve in the early 2000’s, can say no one could have foreseen the problems we have today. Time and again lose money policy has created bubbles, this is no surprise, and this last bubble was the bubble of all bubbles which the Fed is completely responsible for.
The Fed has also become more of a market appeaser than the organization that is supposed to manage our money supply. What I mean is that the Fed adjusts interest rates based on what the market wants, versus what it should actually do. The economy and the markets are totally different and have to be managed differently. Going back to the 1990’s the Fed has been increasing liquidity and doing everything it could to increase credit to everyone, whether they deserved it or not. The Fed cannot create credit, but it can make money so cheap that banks can afford credit losses and that is exactly what happened until cheap credit made its way to mortgages.
A perfect example of how the Fed is more accommodating to the markets than the real economy is when the Fed started raising interest rates in the 2003 area companies like Ford came out crying. The Ford CEO said interest rates need to be lower so they can sell more cars at zero interest rates. What happened, rates leveled out for a time when they should have been much higher. In fact, one can argue that the Fed raises and lowers rates at the wrong time frequently. There are countless other examples, but clearly the Fed is more interested in keeping securitized loans going instead of the old fashioned types of loans that actually stay on the books of banks.
In 2007 Ben said that sub-prime is contained and that there is no problem with the mortgage market, Cramer said the same thing in July of 2007, just practicing full disclosure. However, in August of 2007 the Fed knew there was a problem and started putting hundreds of billions into the overnight market. Either he lied to us or he just felt as though adding liquidity at that level was just a good thing. Regardless, August of 07 Ben should have been adding special liquidity features then, but he waited. In fact, he continued to lie to the American public about the real problems we faced. They knew then the problems that we had, I knew then, but Ben either ignored them or thought he knew better. Perhaps it was a political move to show how good the Federal Reserve is for the economy when they fixed the very problem they caused.
Now we have a $2 trillion dollar Fed balance sheet, expected to grow to $4 trillion, and the Fed is now playing all sorts of games. For example, they moved many of the troubled securities from private banks to, essentially, the government’s balance sheet. We also see some more strange events, like a nice ‘other contract’ section to their balance sheet which, presumably, is some sort of derivative product they have taken on. The question is, if these are derivatives what happens to our country if they blow up?
Finally, we have the monetization of debt that the Fed had started with its quantitative easing program. Monetization of debt is the worst thing a country can do and is a signal that they do not believe others will buy their debt so they buy it themselves. This will eventually create inflation, but in the meantime it destroys the country’s currency, look at the DXY for an example of this. The Fed has also started playing games here as well with having primary dealers sell them new issue treasuries from the last few auctions we had. This artificially boosts demand and keeps the market happy, but, again, is terrible for the currency and a sign that other countries are considering cutting us off.
A case for Ben
He came in and created several innovative programs to fix the mess that they caused. There is no doubt that TALF and other programs have helped improve the economy. I cannot take that away from Ben, but would we have even needed to be saved if the Fed had acted responsibly over the last 20 years? I think you know the answer to that question. However, the Fed did step up with these innovative programs and zero interest rates, but this is likely to create more problems in the future.
Frankly, other than the innovative programs he started there really is no case for him to have a job. There is one exception to that statement, with Ben we know what we are getting and he might be able to know when to stop the programs he started. If we got a Larry Summers, thank God we didn’t, we would have no idea what his policies would be. The unknown is a major problem which is why, in my opinion, Obama is keeping Ben. Since Obama is already moving drastically away from traditional policies if he threw another unknown into the mix he could have a major issue if things blew up. Ben was a safe option for Obama. The reappointment comes on the heels that the Obama administration still has no clue how bad things were, or are, in the economy and that they cannot do math correctly with the projected deficit error that they made earlier in the year.
What I think
I think Ben should have been fired and the Fed needs to be rolled into the treasury department, it is really that simple. Keep all of the governors the Fed has, but if they are a government organization then they would actually be held accountable for their actions. That, of course, would never happen, but I like to think that it could. The Fed has outlived its usefulness and has caused all of the booms and busts we have ever had, why do you think we had the Great Depression in the 1930’s and not in 1907?
Frankly, we will never really know what the Federal Reserve is up to because they do not show anyone their books. The ‘other contract’ column for example, what is it and what risk does the Fed hold on its balance sheet? We don’t know because they do not and will not open their books. When asked who received TARP funds the Fed refused to divulge who got what because it would ‘jeopardize the firs reputation’ or some nonsense like that, that is about to change as the Fed lost the FOIA lawsuit Bloomberg filed.
The point is we know very little about this very privately owned organization that controls our money. Rolling up the Fed under the Treasury Department makes perfect sense because we will know everything that is being done and banks will have the lender of last resort. This is the 21st century and we are still under the 20th century monetary policies which is absurd.
As a nation we can no longer continue creating credit bubbles and have a monetary policy that has caused the dollar to lose 95% of its value since 1971. I am not saying a gold standard or anything like that, but how about a monetary policy that does not cost us any interest to print any money. The problems with the Fed will continue and, perhaps, get worse if Obama gets his way and grants this private organization more control over the financial system. Why would you give a failed organization more power? I guess this is what we get when we elect lawyers to represent us.
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Posted by Ray on July 31, 2009 under Economy, Main, The Federal Reserve |
We have a significant drop in the dollar today, down 1.2% for the day. This is after the “rally” we had over the past week, ironically when the Chinese were in town. This is a growing problem for America and it is not being fully covered by the media.
Now, there are 2 ways to look at this decline.
1. Investors are seeking riskier assets, which is probably totally correct right now, or
2. Our creditors are starting to reduce their dollars, perhaps, but unproven at this time.
I believe that the dollar is under too much pressure and will continue to decline. However, I also believe that support to the dollar is being provided by the Federal Reserve which has told us they are providing quantitative easing. That could explain the rally and the timing of the rally, when the Chinese were here.
Now we have given back those gains and are working lower, but stocks are not up which is a sign of decoupling between the equities market and the value of the dollar. This decoupling may be temporary, but it shows traders believe in the recovery of the economy, which I believe is a false recovery at this time.
Regardless, the decline of the dollar is not good for the US long-term and we need to control spending or our problems could get som much worse. Below is the 5 day, 5 minute interval chart of the DXY Index:
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Posted by Ray on July 29, 2009 under Main, The Federal Reserve |
The Federal Reserve is fighting tooth and nail to prevent the bill to audit its balance sheet. When asking yourself why the Fed would fight this bill so hard one only needs to look at how they conduct their business, in secrecy.
The FMOC meetings are done privately with vague notes released well after the meeting. During these meetings the reserve governors decide on interest rate policy, whether to lower or raise them, and give their general predictions on the economy. Bernanke believes that the bill to audit the Fed may impact these meetings by applying political pressure on these decisions. That argument is just plain ridiculous.
What the Fed does not want anyone to know is how much money is outstanding and who is borrowing what, that is what the bill aims to gather information about. The Fed is the countries bank and we know very little about it other than what is released to us by the fed itself. What kind of transparency do we really have with that type of system?
Since the fed has resisted telling us who borrowed TARP funds, which is a simple request I might add, why should we trust anything they tell us. We have no idea how much gold is left in our reserves and we have very little idea of what other emergency lending the fed has done over the past year. To resist an audit is admission that there is something they do not want us to see.
The fed is a private company who has shareholders, the very banks it lends to, and those shares pay a 6% dividend yield. The shares are not redeemable on any open market, they are private shares. Every time the US Mint prints a dollar it literally borrows the money from the federal reserve which charges the government interest, in other words it is their money we are borrowing, not the countries money.
Given that we pay the fed through interest on our debt I would think they would be happy to accommodate requests of its client for transparency. For example, the fed stopped issuing the M3 money report, why, it is relevant because it gives us a real snapshot of how much money is in the system. They simply want to keep their power and do not want the US citizens to know what they are doing.
As Ron Paul, who introduced the bill, said; “The Fed clearly cherishes its vast power to create and spend trillions of dollars. The only accountability the Federal Reserve has is ultimately to Congress.” and we know how effective Congress is at asking questions, they spend 5 minutes kissing ass before the first question is even asked.
Here is another great quote; “I understand your concern about the Fed’s independence, but you are the one that threw away the independence by acting as an arm of the Treasury and engaging in fiscal policy,” Kentucky Republican Senator Jim Bunning told Bernanke at a July 22 hearing. “Would you rather have an audit of the Fed or give up all of your non-monetary-policy functions?”
Bernanke told the Financial Services Committee that the Fed’s ability to repair the credit markets demonstrates the value of leaving the central bank with broad lending authority.
“We’ve been fairly successful,” he said.
Successful, are you kidding me? The US dollar has lost 95% of its buying power since 1913, when the fed was enacted, and you think that is a good job? The fed left rates extremely low and encouraged “more innovative” mortgage products over the past decade, i.e. ARM and inverse amortization loans. The fed caused our probles and they did a good job? What kind of drugs are they taking. However, Senator Bunning made a point, let us audit you or we will take some of your powers away.
We need to know what our central bank is doing and the only way we can do this is through a real audit.
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Posted by Ray on July 23, 2009 under cnbc, Economy, Main, Markets, The Federal Reserve |
The housing numbers do look better, but there are still major problems to overcome in this market. The first problem is the market wants lower prices on homes, but the government is keeping prices artificially high with incentives and low mortgage rates.
What the government is doing is postponing the inevitable by propping up prices. The recession will end and housing will recover, but not with government intervention. In fact, if we look at Japan they did the same thing we are doing now and their real estate prices are down 80% from their all-time highs. We have come off only 15% year-over-year and the market is telling us it wants prices to go lower.
Out of these impressive housing numbers we see that 31% of sales are a result of short sales and foreclosures. Supply decreased from 9.4 month supply, 3.82 million homes, from a 9.8 month supply reported earlier, historically existing homes have about a 6 month inventory. The reduction of supply is good, but prices are still falling which is a result of this over supply and it is clear that more houses are coming on to the market.
The west shows signs of improved sales, up 6.4%, but the Mid-west and the Northeast is sluggish with .9% and 2.5% increase in sales. What you are not being told is that banks are not putting foreclosed homes on the market, they are holding them or, in some cases, tearing them down which is suppressing supply. If those homes were on the market then these numbers would look worse than what we see.
Keep in mind home builders are pouring concrete as well which is adding to the supply, but not accounted for in these numbers. They need to build in order to make money, but new permits do not mean new sales and the builders are hoping for a rush of new buyers before the November cutoff for the government bribe, I mean bonus, to buy an overpriced home.
Mortgage rates also increased to 5.42% which is “high” compared to a few months ago. The funny thing is rates could be zero, it doesn’t matter because we have a credit problem, not a liquidity problem. If you are not a AAA rated risk the banks will not take you, period. That is coming right from a real estate friend of mine who has buyers, but no financing.
Also, to assume 5.42% mortgage rates are high is just stupid, my mortgage is 5.68% the difference is negligible at best and low rates is not the answer, it is the problem. To think we got here because no one was buying is incredulous, we got here because everyone was buying and they bought everything under the sun on credit. In order to come out of this thing, fast, and not repeat the same bubble again, which we are doing, we need to reduce credit and deleverage the consumer. If we continue this cheap money policy we will never fully recover and the next time this happens it will be sooner and much worse than what we saw starting last fall.
I know that many like Dennis Kneale believe higher stock prices, which is a reaction to the devaluation of our currency, means a recovery, but that is incorrect. Dumping mark-to-market rules to hide or not disclose losses is bad and, again, will merely postpone the problems. Unemployment is a leading indicator in this situation since people cannot find work they cannot pay their bills.
If they can’t pay their bills then defaults will rise on all credit problems, which is what is happening, i.e. Capital One, Advanta and others reporting record credit card losses. Plus, 500K a week initial job claims is not good, I do not know why everyone thinks it is, and once your benefits run out they do not count you as unemployed any longer. Earnings are all from cost cutting, not from real earnings or consumer demand. The firms who actually grow their sales, like Intel, are growing their business overseas, not in the US.
We may show some signs of stabilization, but this thing is not over by a long shot. If we have the next leg down, like I think we will, it will make last fall look like a party. We caused our own problems by becoming a consumer nation instead of a manufacture ring nation, I can hear some say we are still the largest exporter in the world, but we are not. We export technology, heavy equipment, financial services and knowledge which is more expensive than hammers and nails. That is why we are the largest exporter, it is based on dollars and not products.
I know CNBC wants us to believe Dow 9,000 means everything is fine, but it is not. They are having a Dow 9,000 celebration as I write this, they did this a NASDAQ 5,000 and Dow 14,000 as well. All I want from CNBC is for them to tell the truth about things instead of sugar coating everything and pitching “hope.”
I am a seller, not a buyer until I see some compelling evidence to the contrary. The dollar, thanks to our massive debt, will continue to drop in value, which may be the saving grace for stocks, but the dollars buying power is still reduced. While I am a seller of US stocks I am a buyer of foreign stocks and foreign debt which will benefit from a weaker dollar.
If you believe everything is fine then I have some ocean front property I would like to sell you in Iowa.
I do not hold any long or short positions in Capital One, Advant, Intel or any other firm mentioned.
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Posted by Ray on July 22, 2009 under Markets, The Federal Reserve |
As many of you know I have been pointing out the correlation between the weak dollar and higher equity prices. This has caught on and ZeroHedge has even made the connection between the two. Simply put, we are seeing the devaluation of the dollar which leads to higher equity prices and commodity prices, or inflation.
For full disclosure I am short the dollar against most major currencies, i.e. Euro, New Zealand Dollar, Canadian Dollar, and the Pound.
Here is the DXY, dollar index, versus the S&P 500 over the last year.
Here is the DXY on its own, pretty ugly:
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