by ilene - November 4th, 2010 4:44 pm
Courtesy of The Pragmatic Capitalist
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…
Tags: Banks, Dollar, Economy, Equities, Financial Crisis, government, inflation, Jobs, QE2, Richard Fisher, the Federal Reserve, Wall Street
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by ilene - October 26th, 2010 1:28 am
Courtesy of The Pragmatic Capitalist
I wish I could say that I am surprised that Ben Bernanke’s policies are failing, but quite frankly nothing this Fed does ceases to amaze me any longer. His latest folly of QE2 is having profound effects already and it hasn’t even started yet! Unfortunately, it is having its impacts in all the wrong places. The other day, Richard Fisher remarked:
“In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places.”
Welcome to your darkest moments Mr. Fisher. The one thing we can positively confirm about QE2 is that it has not created one single job. But what has it done? It has caused commodities and input prices to skyrocket in recent months. Reference these 10 week moves that have resulted in the Fed already causing “mini bubbles” in various markets:
- Cotton +48%
- Sugar +48%
- Soybeans +20%
- Rice +27%
- Coffee +18%
- Oats +22%
- Copper +17%
Of course, these are all inputs costs for the corporations that have desperately cut costs to try to maintain their margins. With very weak end demand the likelihood that these costs will be passed along to the consumer is extremely low. What does this mean? It means the Fed is unintentionally hurting corporate margins. And that means the Fed is unintentionally hurting the likelihood of a recovery in the labor market.
Tags: Ben Bernanke, Commodities, Corporate margins, Economy, Employment, Financial bubbles, Labor Market, prices, QE2, Richard Fisher, the Fed
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by ilene - October 21st, 2010 8:08 pm
Courtesy of The Pragmatic Capitalist
It looks like the Fed is already beginning to worry about the unintended consequences of QE2. In a speech earlier this week Richard Fisher discussed an important consequence of QE. He said:
“In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places.”
It certainly is working in the wrong places. While the Fed creates paper profits in stocks and bonds QE appears to also be influencing the price of commodities. Commodity prices have surged in recent weeks as the Fed has driven the dollar lower. What’s so pernicious here is the margin compression that Gaius discussed the other day. This is crucial because the margin recovery has been the single most important component of the equity market recovery.
What’s so interesting here is that Ben Bernanke might actually be creating a double headwind for the economy in the coming quarters. Not only is he reducing margins for many corporations, but because quantitative easing is inherently deflationary (because it replaces interest bearing assets with non-interest bearing assets) it is not helping aggregate demand. From the perspective of a corporation this means stagnant revenues and higher input costs. That will only increase the reluctance to hire.
Of course, the Fed thinks they can prop up particular markets and generate a “wealth effect” that is unsupported by the underlying fundamentals. Interestingly, in the long-run, Mr. Bernanke might be creating more damage than he even understands. But at least someone at the Fed is beginning to wonder if this strategy is viable.
Tags: Ben Bernanke, commodity prices, QE2, Richard Fisher, the Fed
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by ilene - November 18th, 2009 3:21 pm
Courtesy of Mish
Yesterday Dallas Federal Reserve President Richard Fisher threw a little cold water on the V-shaped recovery madness everyone seems to be buying into these days.
Please consider Fed’s Fisher: GDP Growth In Third Quarter Likely Lower Than Reported.
Speaking at a conference in Tyler, Texas, Fisher said he was willing to venture that the increase would not be "as robust as originally reported."
He did say, however, that the growth rate would still be positive – though it would be closer to a rate of 2.5 percent – and that growth would also be positive for the fourth quarter.
Even though he said economic growth would be positive, Fisher cautioned that the high unemployment rates would cause recovery from last year’s financial crisis to be slow.
Managing Expectations
Got the idea the Fed is attempting to manage expectations? If so, that is precisely what the Fed is doing.
When asked about the dollar at a question and answer session following his speech, Fisher said that lower interest rates have not increased the risk of the dollar declining in value. Rather, he said, the weakening of the dollar was due to other major currencies entering the world’s economic system.
"You’d expect with more participants that there might be some kind of rebalancing," but such evolution would be orderly and gradual, he said.
Let me get this straight: The dollar is falling because "other major currencies [are] entering the world’s economic system".
Is he serious? What this proves is these guys absolutely cannot think beyond their prepared remarks.
The Effect of Stimulus
A $trillion in stimulus (not counting bank bailouts) and other stimulus measures not labeled "stimulus" because everyone is getting tired of the word, only got us 2.5%-3.0% of GDP growth.
Dave Rosenberg was talking about GDP in today’s Breakfast with Dave
Heightened appetite for risk does not mean that credit problems have gone away as we see the global speculative-grade corporate default rate rise 12 basis points in October, to 9.71%. And Fitch just published a report indicating that the U.S. banks can expect to see 10% of their $1.1 trillion of direct commercial real estate loans default and that the regional banks can expect to see “significant” cuts in their credit ratings.
DOWNGRADE TO GROWTH FORECASTS?
…
Tags: Dave Rosenberg, GDP, Richard Fisher, Stimulus, V-shaped recovery
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site
