Nowadays, the sitting members of the inner circle at the Federal Reserve are
nothing more than political lackeys - conducting the nation's monetary policy,
at the beset of whatever political party happens to hold the upper hand in
the legislature. In his May 29th speech, titled "Central banking at a Crossroads," former
Fed chief Paul Volcker lamented that the Fed had been hijacked by the Treasury
and the White House. In calling for the Bernanke Fed to begin rolling back
QE-3, Volcker said, " There is something else beyond the necessary mechanics
and timely action that is at stake. The credibility of the Federal Reserve,
its commitment to maintain price stability and its ability to stand up against
pressing and partisan political pressures is critical. Independence can't just
be a slogan," he warned.
Today's reality is however, the Fed has become the "fourth branch of the US-government." Acting
in strict secrecy, the Fed determines "target rates" for unemployment and inflation,
manipulates interest rates, grows the money supply, rigs the value of the stock
market, and regulates the nation's banks. And there is no longer any pretense
of an allegiance to "Moral Hazard." Congress and the American people are left
in the dark. Nowadays, the ruling leaders of the Democratic Party are utterly
opposed to auditing the Fed , because they realize the central bank is the
goose that lays the golden eggs. The Fed is buying $45-billion of US Treasury
notes each month, and thereby financing the US welfare state, at low interest
rates.
Whoever the President picks to run the Fed should be expected act in accordance
with the wishes of the White House and the Treasury. On Oct 1st, US President
Barack Obama told NPR News, "Ben Bernanke's done an outstanding job. He's maintained
confidence. And whoever I appoint will continue many of the smart policies
that Ben Bernanke's made." The code words "maintaining confidence," refers
to the Fed's ability to keep the "Least Loved Stock market Rally" climbing
higher along an upward trajectory, even amid anemic economic growth.
Bernanke has engineered the fourth biggest Bull market in Wall Street's history.
There've been pullbacks and short-lived corrections along the way, but the
Fed has always kept its foot pressed firmly on the monetary accelerator, and
thereby keeps the speculative juices flowing. Over the past 1-½ years,
the Fed has increased the high octane MZM money supply by +10% to an all-time
high of $12-trillion. In turn, traders have bid-up the combined value of NYSE
and Nasdaq listed stocks to a record $22-trillion. That's great news for the
Richest-10% of Americans that own 80% of the shares on the stock exchanges.
(1) Financial Suppression - As for Bernanke's successor, - the only qualification
is a readiness to monetize the Treasury's debt, and to funnel even more money
into the financial markets, through its clandestine activities. The CBO has
warned the ruling political class and the Fed that if Treasury yields move
back to their averages in the 1990's, it's a scenario that would add $1.44-trillion
in interest costs over 10-years. Thus, the first reason the Fed balked at Tapering
QE, it needs to keep the cost of financing Washington's debt as low as possible.
However, the higher the stock market climbs, - the greater the chance of a
sharp correction along the way. On October 2nd, the US Treasury chief Jacob
Lew and President Obama with the key members of the "Plunge Protection Team" (PPT),
at the White House, in an effort to plot future strategies on how to deal with
any possible shakeouts in the stock market, when Bearish news arrives. The
meeting included the elite of the financial aristocracy, - the CEO's of JP-Morgan
Chase, Goldman Sachs, Citigroup, Deutsche Bank, and Bank of America , Morgan
Stanley, and Wells Fargo . The PPT aims to have a rescue plan in place, if
upcoming negotiations over the debt ceiling with the House Republicans get
deadlocked.
Still, the wealth that's building up on Wall Street is not "trickling down" to
the struggling masses on Main Street. Pushing up equity and home prices is
mostly benefiting the wealthiest of Americans . The Fed's own Survey of Consumer
Finances in 2010, the last year for which data are available, explains why.
It shows that the Top-10% of US-income earners had financial assets totaling
$550,800, or 20-times the holdings ($27,550) of the other 90 percent . The
Top-10% of the wealthiest Americans own 80% of the shares listed on the NYSE
and Nasdaq, while the median equity holdings of the rest of the population
was only $17,700, hardly enough to make a difference in one's lifetime. That's
because half of the US-citizenry owns no equities at all and can't participate
in the Fed's easy money give-away.
Thanks to QE, wealth inequality in America is at its widest since the 1920's,
in both relative and absolute terms. Last year, the real median household income
in America was $51,017, a -5% drop from 2008. On the flip side, the Top-1%
owns 42% of America's wealth and raked in 95% of all income gains since 2008,
while scoring an average income of $717,000 per year. Corporations and wealthy
individuals are increasingly using political campaign contributions to control
the government. Their PAC contributions exploded during the 2012 elections,
virtually hijacking Washington and moved politicians towards a government of "the
Ultra-Rich, by the Ultra-Rich, and for the Ultra-Rich." However, "An imbalance
between rich and poor is the oldest and most fatal ailment of all republics," -
Plutarch
Prior to the era of "Zero Interest Rate Policies" (ZIRP), central bankers
mostly preferred to operate under the cloak of obfuscation, - keeping traders
confused and guessing about their next adjustments of the overnight loan rate.
A select clique of Treasury bond dealers was usually privy to the inner thinking
of the central bank, since they took great risks in underwriting the government's
debt. Bond dealers are tipped off first, and only afterwards, are leaks released
to the financial media, and disseminated more widely to the general public
- with a vague clue of what might happen next.
The "Tapering' Trial Balloon, - And so it was on May 12th, with the yield
on the US Treasury's 10-year T-note hovering around 1.65%, - the Fed leaked
a story to the Wall Street Journal, - hinting that it was thinking about how
to wind down its massive purchases of $85-billion per month of Treasuries and
mortgage-backed securities (MBS's). "Officials say they plan to reduce the
amount of bonds they buy in careful and potentially halting steps, varying
their purchases as their confidence about the job market and inflation evolves.
The start time has yet to be determined," wrote the WSJ's Jon Hilsenrath. That
story lifted 10-year T-note yields about +50-basis points (bps) higher to just
above 2%-percent.
One month later, on June 7th, former Fed chief Alan Greenspan jolted bond
yields higher, by telling listeners to CNBC that the Fed should start tapering
its QE-3 scheme without delay. "My view is the sooner we come to grips with
this excessive level of assets on the balance sheet of the Federal Reserve,
which everyone agrees is excessive, the better," he said. "I think a gradual
withdrawal from QE is adequate, but we've got to get moving. I think we've
got to do it even if we don't think the economy it is strong enough." The resulting
speculation that the biggest buyer of T-bonds could soon begin to withdraw
from the marketplace, triggered an upward spiral in the 10-year T-note yield
to as high as 2.25% the following week.
The notion that Greenspan was acting as a mouthpiece for the Fed, was given
extra credence on June 19th, when Fed chief Bernanke ended weeks of speculation
by saying the US-central bank would likely slow its bond-buying program later
this year and end it next year if the economy continues to improve. Bernanke
said the reductions would occur in ''measured steps'' and that the purchases
could end by the middle of 2014. By then, - he thought unemployment would be
around 7%. Bernanke tried to explain that any reduction in the Fed's $85-billion-a
month in bond purchases would be like a driver letting up on a gas pedal rather
than applying the brakes. He stressed that even after the Fed ends its bond
purchases, it will continue to maintain its vast bond portfolio, to help keep
bond yields down.
The sudden and unexpected threat of Fed Tapering of QE rocked the global bond
markets, sending yields significantly higher in the developed markets and sharply
higher in the Emerging markets. Government bond yields in Australia Britain,
Canada, Hong Kong and US all moved upwards by +135-bps to +170-bps, and in
close synchronization. Ten year bond yields in mainland China rose +85-bps
to as high as 4.25%. Despite repeated assertions by Fed officials that they
are committed to ZIRP for the foreseeable future, hints of QE tapering triggered
sharp losses in Emerging-market currencies and capital markets, - a harsh reminder
that if the Fed unwinds its super easy monetary policy, there are large unintended
spillover effects on capital flows to Emerging markets.
Fed back-pedals, Balks at Tapering QE - After telegraphing to the global markets
an impending shift in Fed policy for four months, the time had finally arrived
for the Fed to take its first baby step towards tapering QE-3. Traders were
convinced that Tapering would begin at the Sept 18th meeting. However, the
Fed got cold feet, and balked. Citing a recent "tightening of financial conditions" -
caused, at least in part, by expectations of tapering, " The Committee decided
to await more evidence that progress will be sustained before adjusting the
pace of its purchases," the Fed said. Yields on the Treasury's 10-year note
subsequently fell to as low as 2.60%, from as high as 3% earlier.
More surprisingly, Bernanke signaled an even bigger retreat from Tapering,
by backing away from other red-lines, such as the 7% unemployment rate threshold
for ending bond purchases and a 6.5% jobless rate for hiking the federal funds
rate. Thus, we can expect that US-government apparatchiks that fudge statistics,
to paint a picture of the US-economy that's muddling along at a +2% growth
rate. That's good enough to keep the stock market buoyant while helping to
keep a lid on long-term bond yields.
(3) Few Signs of Commodity Inflation - In one respect, the T-bond markets
appear to be misguided, at least temporarily. Bond yields have surged higher
even though commodity indexes are tumbling. Earlier this week, the price of
Corn fell below $4.50 per bushel, to its lowest level in 3-years. Corn, America's
biggest crop, has slumped -36% so far this year. Soybeans have slumped to $12.65
/bushel, down sharply from as high as $18 /bushel last summer. With the price
of coffee languishing at $1.14 /pound in the wholesale market, there's no sign
of inflation in the food prices. Likewise, unleaded gasoline futures on the
Nymex have slumped to $2.60 /gallon, and natural gas is buried at $3.50 per
mBtu. Overall, the Continuous Commodity Index (CCI, - a basket of 17-equally
weighted commodities is trading -12% lower than a year ago , - not only signaling
a lack of inflationary pressures, but also the possibility of deflation taking
hold . By keeping QE-3 intact at $85-billion per month, the Fed might be trying
to push back against the possibility of falling consumer prices, - or deflation.
(3) Threat to Housing market, - A second possible reason for the Fed's backtracking
was the upward spiral in 30-year mortgage rates to as high as 4.80%, on average,
at just the hint of tapering. In turn, applications for loans to purchase homes
plunged, with refinancing activity fell to its lowest in more than four years,
- the Mortgage Bankers Association (MBA) reported on Sept 11th. That put the
MBA's activity index at its lowest since November 2008 and the depths of the
financial crisis. Higher interest rates could undermine the housing market
- that's counted upon to buoy household spending and generate construction
jobs.
Wells Fargo says it expects mortgage originations to drop nearly -30% in the
third quarter to roughly $80-billion. JP-Morgan, (JPM) meanwhile, has said
it expects to lose money on its mortgage-origination business in the second
half of the year, and that mortgage originations are on pace to drop as much
as -40% from the first half of the year. JP- Morgan, Bank of America, Wells
Fargo and Citigroup already have cut more than 10,000 mortgage jobs this year,
with JPM accelerating plans to cut as many as 15,000 jobs in its mortgage division
by the end of 2014. This evidence of an economic slowdown was coming into focus,
one week ahead of the Fed meeting, - which put a yellow caution flag out for
the Fed.
(4) Turmoil in Emerging markets , - A third possible reason that led the Fed
to put Tapering on ice was the rout in the Emerging markets, especially those
countries with large current-account deficits, and large foreign capital flows
relative to the size of their financial markets. Among the most vulnerable
are Turkey, South Africa, Brazil, India, and Indonesia - a group that Morgan
Stanley dubbed the "Fragile Five." Emerging markets (ex-China) are supposed
to be more resilient now because they have $5.6-trillion in reserves. But selling
FX reserves also means draining the supply of local currency, - a quasi form
of monetary tightening. And Emerging nations make-up about half of the world
economy, upon which US Multi-Nationals increasingly depend for sales growth.
One of the most startling developments in global equity markets this year
was the sharp contrast in performance between developed and emerging markets.
Through July 31, 2013, Emerging markets lost -8.4%, while developed markets
gained +14.5% and the S&P-500 index gained +19.6%. Moreover, the larger,
more established BRIC markets (Brazil, Russia, India, and China) led the retreat.
The MSCI BRIC Index declined -11.2% this year through July. Whereas the BRIC
countries were an engine of growth for the world economy, that engine began
to sputter, especially after the Fed signaled tapering QE.
In the case of Brazil, fears of Fed tapering lifted the US-dollar from as
low as 1.96-Brazilian Reals, to as high as 2.45-reals, a gain of +25%. In turn,
a weaker Real fueled an accelerating inflation rate and forced the Bank of
Brazil to hike its overnight Selic rate, from 7.25% in April to a 16-month
high of 9% on August 28th, - seeking to rebuild confidence in the currency.
Restoring stability in the Real was essential in order to cap the surge in
Brazil's 10-year bond yield, which hit a high of 12.37% in August, after starting
the year at 9.15%.
Brazil 's central bank left the door open for more rate hikes by reiterating
that the latest increase is part of an ongoing rate-adjustment process. On
August 22nd, Brazil's central bank announced a currency-intervention program
to inject $60-billion worth of US-dollars and insurance into the foreign-exchange
market by year-end, a move aimed at bolstering the Real, after it slipped to
near five-year lows against the US$. However, the Fed's surprising retreat
from Tapering was the Real's most important Savior, as the US$ fell towards
2.20-reals today, down from a 5-year high near 2.45-reals in August.
(5) Fear of Bursting Bubbles in the Stock market, - While couching its retreat
from Tapering, in terms of the need to bring down unemployment, the major concern
of the Fed is not the worsening plight of millions of working people, but rather
the need to keep equity prices perched in the stratosphere . I nstead of standing
outside of financial markets and simply acting as a lender of last resort,
the Fed and other central banks are massively intervening to keep the markets
propped up. Significant "tapering" is therefore dangerous - it would bring
about a collapse in inflated bubbles in numerous NYSE and Nasdaq listed companies.
Meanwhile, it now looks as though QE Infinity is the "New Normal." "A government
unable to reduce its debt will be on the lookout for cheap ways to fund its
profligacy. Financial repression is one way of doing so," according to HSBC
Chief Economist Stephen King. "Quantitative easing pushes down bond yields
- even when fiscal policy is out of control. It allows governments to avoid
being punished by markets for lack of fiscal discipline. Repression allows
governments to delay austerity and to fund excessive borrowing at very low
cost. Seen this way, repression is not so much a mechanism designed to reduce
government debt but, rather, a way to live with it," King said.
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