REVISITING RICHARD FISHER’S “DARKEST MOMENTS”
It’s been less than two weeks since I first discussed Richard Fisher’s “darkest moments”, but the markets have made some incredible moves since then so I wanted to revisit the piece. After the FOMC meeting yesterday Ben Bernanke released an op-ed for the Washington Post. His comments were incredibly important. Not only did he say that he was directly attempting to prop up equity markets (that’s right America – we have resorted to officially admitted that our central bank is running a ponzi scheme), but he also admitted that the Fed’s actions are not inflationary. Why you ask? Because, as I’ve emphasized in recent weeks this operation does not add net new financial assets to the private sector. It does not boost lending. It does not create jobs. It does not boost wages. Bernanke essentially admits as much:
“Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.
Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.”
He’s hoping to create an equity market “wealth effect” that is unsupported by the underlying fundamentals – Greenspan 101. So, we’re in this situation where end demand remains very weak in the United States. But Mr. Bernanke knows this operation is unlikely to result in any real lasting inflationary impact. But his commentary alone is having an astounding impact on markets. In essence, he is herding investors into equities and commodities as investors believe that the policy is inflationary. Unfortunately, the assets that have rallied the most since August are important inputs in every day products:
- Cotton + 68%
- Sugar +66%
- Soybeans +23%
- Rice +29%
- Coffee +15%
- Oats +31%
- Copper +16%
Some people are wondering if Mr. Bernanke is attempting to blow a bubble in the equity market? It’s not necessarily the equity bubble he should be worried about. He is already blowing bubbles in segments of the commodity world (hello summer of 2008). Charts like these should scare the living daylights out of a fed chief, but Bernanke appears oblivious to the unintended consequences here:
(December Cotton Futures)
The one thing Mr. Bernanke has gotten right in all of this QE nonsense is that it won’t be inflationary. A weak U.S. consumer can only open their wallets so far. In the meantime, Mr. Bernanke is putting an unnecessary burden on corporations by reducing their margins. This will not result in higher wages and it will not result in more jobs. It will only result in more uncertainty and weaker fundamentals. Investors are buying into the idea that this is somehow all good for equity markets and the economy. Blowing bubbles has never been a strategy for economic prosperity. But we’ve been down this road before. Some people just never learn from history. Even people who clam to be history buffs.
Richly valued equities in the face of impending, perhaps already underway, margin compression at firms combating increased input prices in the face of poor demand.
Some way to prop stock markets up this!
How does one hedge for all of this? Obviously, the fed is driving prices higher. We all know that it can and likely will end in disaster, but that doesn’t mean there aren’t ways to make money in the near-term. Is gold the way to play this? Fear and inflation?
What about the reduction in government spending from the elimination of bond income? Ultimately that is the only fundamental change that will happen with QE – the replacement of an asset with a lower yielding one.
All you are seeing is a portfolio readjustment driven largely by a complete lack of understanding of what has actually happen. Short term prices will be all over the place, but medium term it has to come back to that – asset replacement.
For my money what has happened is people have loaded up on stocks and shares hoping to flog them to those who sell out of bonds when the Fed goes buying. Except that isn’t how the market is going to work.
Bond sales are by those who were selling anyway. The Fed is actually going to be competing with bond *buyers*, so all that will happen is the price of bonds will go up a bit and the sellers will get more for their bonds. In a sane market the price difference would simply be the capitalised present value of the income stream given up.
What happens subsequently depends entirely on why bond sellers were bond sellers in the first place and whether bond buyers turn up as they otherwise would have done.
government lying about job growth(panzer)?:
sorry
http://panzner.typepad.com/.a/6a00d83451591e69e20133f58f9a31970b-pi
When earnings are good, when valuation is not extreme, all that matters is liquidity, and we have more than ample liquidity, where will the stock go?
Folks, never fight the FED. If it hands out puts, why not go all in?
Check out the collapse in historical vs. implied volatility that’s going on right now…
Looks identical to the Jan/April tops.
Would love to hear voltrader’s comments on this if you’re around…
http://www.ivolatility.com/options.j?ticker=SPX:CBOE&R=1&period=12&chart=2&vct
Sounds like our Fed has instructed everyone to just keep dancing, knowing that when the music stops, we’ll have a chair shortage. So, the very shrewd will fleece the naive, AGAIN! Welcome to the QE2 Ballroom Dance.
QE is of course inflationary, but the inflation isn’t happening here, it is happening now in emerging markets. Will it come here too? Of course, but it will take a bit of time.
So, Bernanke agrees with me that his intention is to drive up stock price, maybe people should listen to me?
I’ll tell you when this stock market rally will be over. It will be over
1) When you hear everybody on this board says “shiit, I should have bought earlier”.
2) When everyone on the Zerohedge board says “go to hell, tyler durden, you ruined me.”
By the way, comparing Japan to US is not appropriate, $$$ is not Yen.
The Fed has taken every opportunity to vehemently oppose any sort of oversight of their actions, using the excuse of “politicizing” the Fed–despite the fact that they are an unelected body seemingly responsible to no one. Yet Bernanke has been more than willing to politicize the Fed when it serves his own purposes. First, he and his members have open dialogue with “friends” on Wall Street to avoid unpleasant surprises (or is it simply to help out old friends?). Second, Bernanke sent out a questionnaire to the Street so that he could effectively game the QE2 announcement to live up to expectations. And now he writes an op ed in the Washington Post.
Beyond politicization, The Fed has effectively usurped the power of the purse from Congress by issuing blanket guarantees of private assets–particularly egregious in the case of FNM/FRE where there was not political will to guarantee them through the constitutionally required Congressional route. While there are not direct inflationary effects of QE2 through changes in money supply, Bernanke has clearly managed to spur rampant commodity inflation (i.e., asset speculation) which will have a similar deleterious effect on savers and consumers.
Yet, as American people, we have no recourse to vote against the Fed since they are an unelected body with little to no oversight. Where is the outrage by those who (rightly in my opinion) are up in arms over the Federal government’s unabated expansion and penchant for bailouts and socialization of private losses? This is clearly just as serious of an issue, if not more. And to all of the cynical cheerleaders on Wall St who support QE2 simply because it helps them pad their annual bonus after a lackluster year through the first three quarters, I have a message: When the wheels come off this time, you will be forced to deal with the consequences on your own. Wall St. had the best of both worlds when the previous bubbles have blown up; this time you will fail and suffer like the prudent have been for a decade and counting.
The economy is healing, everyone I know says their company is hiring or hired back those they fired. My company is continuously hiring, a recruiter on one of my email groups is constantly sending out hiring information.
I think economy is improving, at least, in the high tech area. A double dip is not very likely, but the growth will be slow at first, and could pick up suddenly together with inflation once people are tired of talking about recession and depression.
I think it is extremely unlikely that we’ll see a bear market in the near future, a %3 to 4% correction at best.
Buy on the dip.
NEF,
no bear market huh…? OK See ya at SPX 1000 by January 2011. I hope you stay to your conviction and continue to buy since you got the FED’s puts right?…
What are you smoking frankly ?
Also, labor turnover is happening again, two of my colleague recently left the group, and my group is small group.
Not to belabor the QE issue, but this is an interesting piece from Fund My Mutual Fund about the math of QE:
http://www.fundmymutualfund.com/2010/11/if-qe2-goes-to-goldman-extreme-of.html
—
As I think about the eventual end game here, some of the math is quite remarkable.
1) At this point of the $13.7T in outstanding debt, $9.1T is held by the public (the other $4.6T is placed in a category called intragovernmental holdings)
2) Foreign holdings of the $9.1T in public hands currently stands at $4.2T – China and Japan being the leaders at $800-$900B each.
3) QE1 concentrated on a backdoor bailout of the banks by letting them offload toxic assets to the Fed (CMBS & MBS) for a “mighty fine price!” that they could not get on the open market. Hence much of QE1 was not in Treasuries but in far more riskier paper – that said, roughly $850B of US Treasuries sit on the Fed balance sheet.
*a quick tangent is that the Fed is about to pass China as the largest holder of U.S. sovereign debt. (just don’t call it monetization of debt)
Bigger picture
$9.1T of ‘publicly held’ debt available
-$4.2T held by foreign governments
Leaving only $4.9T in domestic hands and available for our Ponzi scheme….. of which the Fed already owns $0.85T, leaving $4.05T
Today we should get an open ended announcement covering roughly 6 months, and $500B. (roughly $100B a month) That takes us to $3.55T available as we hit April Fools’ Day 2011. Then the door will be left open to additional purchases until the Wizard of Oz gets his way. Goldman has opined this could be $2 Trillion over 18-24 months. (or $1.5T above the initial batch that will be unleashed in 3 hours)
You can do the math. “Only” $2T of Treasuries are left over.
Conclusion? It’s time to do another stimulus, this time – maybe double the last one ($1.6T!) We need to create debt for the Fed to run its Ponzi scheme.
(of course I am leaving out MBS, CMBS, Fannie & Freddie debt which most likely are the eventual targets of QE2, 3, 4, 5, 6, or 7)
Good grief Charlie Brown.
—
Oro: I would add muni and state debt to this, as well. Factor in maturity variables (how much 30yr debt out there is there?) and things can get awfully interesting.
You know, at a certain point, it does start to look like literal ponzi finance. What happens if big money, like sovereigns, starts to see it this way?
non economist — Didn’t you leave this board about a week ago in huff because everyone was sick of you posting the same thing over and over? And yet here you are again. You’re the blog post version of someone with Tourettes Styndrome.
I reappeared because Bernanke said I was right, maybe TPC should add an ignore function so you don’t have to read my comments.
I’m sorry if the stock market and I hurt your feeling, but I meant to help people to understand the situation, oh well, maybe I’m just wasting my time.
Yep — Ol Ben gave you a call and checked in with you right? Funny, I didn’t read in the Op Ed where Ben said, “You know, non economist was right. We should have been listening to him all along.” Get over yerself dude.
You’re not hurting my feelings n-e-f. Don’t flatter yourself. You do amuse me though, in the way a 12 year can be amusing when he’s stomping up and down screaming “Listen to MEEEEE!!!!”
See I hurt your feeling. You even deny Bernanke agreed with me his intention was to pump up markets, what else do I need to prove that point? 12 year old would admit that, but not you I guess.
I feel your pain, buddy, I made mistakes too, but don’t hold onto the mistake just because I challenged you, please don’t.
NEF, I agree that you buy any dip right here. But there is going to be a point in the future, the date nobody knows, where this thing completely falls apart. I agree that the economy is getting better, but very slowly and in a very limited number of industries. I think the peak in this cycle is either this quarter or next, then you will start to see the stress at the state and local level boil over.
So you are correct. Ride this wave for a while longer. Heck, it gives everyone a nice chance to up their hedges. That’s the way I look at it.
Is English your first language?
Stocks are up, so is the gas on the pump and food in the grocery store. It’s not real value. it’s all smoke and BS. It hurts the savers and retirees and the low-income people. It’s the failed policy all over again.
http://www.creators.com/opinion/thomas-sowell/guess-who.html
“Mr. Bernanke is putting an unnecessary burden on corporations by reducing their margins”
I think this is a strong point that you and others have been making recently, but there’s one detail I haven’t seen touched on… It will cause a shift in margins from commodity users TO commodity producers. Now for the US on aggregate (which I’m pretty sure is a net commodity importer, perhaps even if you excluded oil?), that does still mean an aggregate margin squeeze… but perhaps a little less than implied given that the US does have commodity producers who will benefit. I don’t know the numbers though, so perhaps our commodity production relative to commodity imports is too small to bother mentioning?
Well said! Ben will be remembered as nemesis chump who orchestrated the mother of all crash.
Credit crisis was bailed out by the sovereign crisis with exploding deficits and kicking the debt can down the road.
Next stop in the twilight zone is the currency crisis driven by devaluations and money printing via QE 2, 3, 4, etc.
Final stop may be mother of all crash of non-hard assets like stocks and bonds leading to global Great Depression II.
That’s exactly right… That’s frightening. I truly think we are going towards a global depression. Imbalances are going to explode in our faces and then we will be in a very different world!
Like I predicted last week, market shoot up after FED announcement. So far I haven’t seen any weakness in any market. we just have to buy every dip. But do remember leverage is building up along with trend. Market can turn into panic in no time.
Bush tax cuts look to be extended. Market is screaming….the bears are leaning on each other for support. Scary! This has the feel of a “can’t lose” market. So what “event” could derail this move? I ask. There needs to be an “event” not the general arguement that is so worn out by people on this site….what “event” would derail this rally.
Stimulus will be on the table again soon, and stimulus will generate inflation as there are so much liquidity in the market.
How many times bears tell you that can’t happen, that can’t happen, and every time things happen. The point is if FED is afraid of deflation, there surely will not be deflation. Once the threat is identified, human beings have tools to fight that. The threat is when people are not aware of the threat, so our threat now is clearly inflation, not deflation.
Please buy as much as you can and use lots of leverage too. You are right and you are smart.
The other side effect of the QE announcement is to lift the veil on everything else that has been ticking on in the background for the past 3 weeks. European news as been completely shrouded and as the market has been holding its collective breath. Actually the analogy we would prefer is it has been gagging with its hand over its mouth on a bad Irish/Greek prawn waiting for the speeches to be over before it legs it to the toilets and chucks its Euro guts up. Six months ago Irish spreads going to where they are now together with bombs going off in Athens’ Embassies as someone tries to incite revolution may just have seen EUR/CHF FALL. Not Rally. We are are pretty close to reloading EUR/CHF shorts just in case (we also like the soothsayer signals in it). We cant be that far off SNB relief exit levels either. It also ties in with our view on Euro rates
Truth… BUT no one ever gets “the event” right. Lots of people said we had structural issues in the financial system, nobody said Lehman will collapse and set off a global liquidity crisis over the course of a weekend (at least not in any appreciable amount of time before it happened)… and on and on with historical examples.
It’s much easier to identify a powder keg than the exact spark that will set it off. That said, if idiots are playing with matches and smoking cig’s in the area, my butt is turning and running the other way…
we are almost there. Gotta get the last of the lemmings (especially those who like to believe in the FED’s power) to fully commit. Too obvious to let the market fall right away. 2 – 3 or weeks of grind to let the big guys a chance to distribute more.
“His comments were incredibly important. Not only did he say that he was directly attempting to prop up equity markets (that’s right America – we have resorted to officially admitted that our central bank is running a ponzi scheme), but he also admitted that the Fed’s actions are not inflationary.”
Thats a bit of a contradiction.
How can any one thinks that commodity prices are not going to translatable in inflation is a mystery to me.
There is inflation in many part of the world and US dollars are moving abroad where rate are higher. Ben Bernanke is basically subsidizing leverage at next to 0%.
When is music stops this time, the ones missing a chair will not be the banks. We are probably witnessing the biggest transfer of wealth in human history.
Higher rate can slow demand but when subsidized rate stop its not a rate increase it the end of a free ride and Billions of dollar invested abroad at higher rate will move back in to the US economy and that may very well be when the inflation spiral will really kick in.
non_economist_fortunately -
Enjoy the sunshine, but keep an eye out for circling hawks as it’s sometimes hard to see the cliff arriving when you’re traveling in a deep pack of lemmings.
I didn’t say Bernanke’s policy is right, I just say they can prop up asset prices, obviously, there will be an end to bad policy, but I don’t think it’ll be next week, next month or next year, it’ll be years away. It’s too early to get on the short side.
Listen to Marc Faber, he is of course much better than me on market timing.
Yes you are right please buy and use leverage.
http://curezone.com/upload/_U_V_W_Forums/Vaccination/sheep_off_cliff.jpg
My vote for the story of the day:
http://www.businessinsider.com/gop-leader-mcconnell-already-threatening-to-make-the-us-default-2010-11
Ben might be bad but this is plain nuts
95% of posters still bearish
Equities still far cheaper than bonds and Bernanke exporting cheap finance to the globe – Asia killing it, US centric blogosphere gripped with fear and anger
Equities are nowhere near a bubble
The only bubble outside of bonds is in the number of Bernanke critics
You are missing the point.
As a side comment, Buffett was saying in 2007 that the equity market was not cheap but not a bubble at all and he was right. However, that was not where the problem was. I won’t explain it though because it has already been done here so many times in many different ways…
YOU KNOW – I HAVE BEEN A REPUBLICAN ALL MY LIFE – AND STILL AM ONE.
AND – I FIND COMMENTARY LIKE THIS ONE QUITE INTERESTING – WHERE MANY OF THE FACTS IN THIS ARTICLE – ARE SIMPLY ‘BENT’ TO MALE A POINT – THAT IS REALLY NOT ACCURATE.
IT REMINDS ME OF THE SAYING THAT ‘WHAT YOU BELIEVE – YOU SEE’
GOOD LUCK WITH YOUR PESIMISTIC VIEWS.
I AM FULLY INVESTED IN EQUITIES – ‘LONG’ AND HAVE
BEEN ENJOYING A VERY NICE RIDE – - UP – -THESE PAST SEVERAL MONTHS.
REMEMBER THRE OTHER OLD SAYING. – - – - – DON’T FIGHT THE FED !!
You two genius should have told us all pessimist two months ago.
“REMEMBER THRE OTHER OLD SAYING. – – – – – DON’T FIGHT THE FED !!”
You memory is short, the fed was pumping money and bullish in 2007.
Perhaps you forgot that the market is still below 1998.
Keep going with the fed you should eventually break even minus inflation by the end of the decade.
tpc,
you seem silent on this discussion. Questions: You are saying that QE does not create inflation, yet……. Why do you see QE as the cause of the commodity price inflation? Is it solely b/o psychology of people EXPECTING inflation? And why in commodities and not elsewhere? and/or, do you consider stock prices INFLATION? gold prices?? why did you not include gold in your commodity listing? What about the bonuses of the financial house CEO’s this year? and will that money be added to the economy? I have to admit, this is pretty confusing for me. Seems like your terms for inflation need to be more carefully defined. Seems to me like there is inflation in numerous places, just not in end products. And if QE is not adding money into the system (I’m not saying it is) then why is QE having these effects? Is it all perception, human emotions, human behavior? Thanks! rhp
Hey RHP,
I’ve been busy today. Sorry. I see the impact on prices as mostly psychological. Did you see the H Schultz piece on the front page?
Stock and gold prices are not raw goods. They are merely speculative bets. That’s not entirely true actually. Gold has some real economic value, but for the most part it is a monetary alternative so there is a huge speculative premium.
Thanks TPC, Terminology gets confusing. Despite gold and stocks not being raw goods, I’m not so sure that the increase in commodity pricing is not also a “speculative bet” as oil was when it hit $147 a barrel. And in just now reading H Schultz, he uses the word “speculator” in terms of coffee prices. Maybe there is a distinction to be made between speculation and inflation on a temporal or shorter term psych basis (yeah, I followed prechter for a while!)
so, if I get the gist of what you are saying, the rise in certain asset prices is NOT the result of a real monetary policy cause and effect, but rather, an unsustainable bubble effect that will revert to the mean once people come to their senses. That’s all fine with me, but how to then explain increased corporate earnings and railroad volumes increasing?? Is this all based on a positive psychology that will crash because deleveraging has not yet been accomplished? I don’t doubt it, but just asking?
Being a physician by training, Bernanke’s policy seems akin to filling a patient up with more fluids when his heart is not pumping well (velocity). It bloats the system but doesn’t increase end delivery of oxygen to the tissues where it is needed. Very dangerous for the patient!
rhp
Earnings have certainly surprised to the upside. I think most people underestimated how strong the asian recovery has been and also the strength in margins. These two factors have led to very good earnings.
But have things gotten that much better in the last two months? Should coffee and cotton prices be 75% higher? No. That is sheer speculation and the result of dollar devaluation. As Schultz said, nothing has changed in the supply/demand of the markets.
In the end, I don’t think the input costs get passed along so consumer prices will remain low. So yes, it certainly does feel like oil at $147 to me….
I am not TPC but:
- the rise in corporate profits has to do with companies laying off and increasing productivity when the recession hit 3 years ago. Their revenue decreased dramatically and is still pretty depressed compared to pre-crisis levels. Moreover, certain institutions have been artificially supported by government policies with all different kinds of stimuli (financials mostly – yield curve for example). Finally, companies have been restocking until recently.
- the rise in rail traffic has increased since 2009 by around 10.5% but is still 8 to 10% below 2008 and 2007 levels! Auto transport is 25% below 2008! And remember a lot of it has to do with restocking. If you look at the 3rd quarter GDP report you will see that 2/3 of the growth was restocking and 1/3 was consumer spending. That doesn’t look sustainable unless of course consumers/employers suddenly get optimistic about the future and start spending again.
Thanks G and TPC,
If you listen to H Schultz’s video he says Starbucks revenues were high, so I can’t attribute that to restocking. Seems like Starbucks is the ultimate discretionary income company (unless it is serving an addiction!)
So, next question: If Fed policy is NOT devaluing the dollar through “printing money”, can you pinpoint the exact cause of the dollar devaluation? i.e. it is not being done by monetary policy but by uncontrolled fiscal policy? thx