Economic Commentary

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[quote author="no_vaseline" date=1253744849]What's stopping 1979-1983 from happening again?</blockquote>


The fact that Larry Summers has locked Paul Volker in the janitor's closet of the West Wing, for one. ;-)
 
No_Vas - What do you think the chances are that Bernanke will raise the Fed funds rate if asset prices keep sinking, ie. real estate, MBS, CDS, interest rate swaps, bank loan portfolios, and the only things that increase in price are consumer staples, consumer interest rates, and equities?

Unless I am mistaken, your whole premise is based on the idea that Bernanke will raise rates. Which rates I am not sure. The Fed funds rate? Discount window? Overnight lending? All three?

Why do you think Bernanke will raise the interest rates in his control? To curb price inflation? What would that do to the economy? Do you think it would have deleterious effects on the economy? And if so, do you think Bernenke is willing to take that responsibility, ala Volker?
 
<strong>Rates will stay low for the next 18-24 months </strong>

Bank of Canada?s chief Mark Carney is on the wires saying that the U.S. recovery

is going to be ?uneven? for the next 18 months. So expect rates to stay low for at

least that long and one has to wonder what the outlook is for risk/beta assets since

we all know that the ?uneven? recovery in 2002 brought with it heightened volatility

and disappointment in the aftermath of an initial 45% bounce in the Nasdaq on high

hopes, at the time, over a V-shaped rebound.



<strong>

MIXED SALES PERFORMANCE IN THE U.S.A.</strong>

The International Council of Shopping Centre (ICSC) retail sales index slid 2.0% in

the September 19 week, the largest decline since the turn of the year, but we are

already starting to see the YoY comparables improve (+0.6%) from the post-

Lehman detonation in the economic data. It will be interesting to see how much

the markets focus on improving YoY figures even as the sequential data begin to

deteriorate. According to the ICSI, ?customer traffic was down sharply at

department stores? and was ?more mixed in other store types.? Overall mall traffic

was the lowest since late April. The softness in sales occurred despite decent

weather and the decline (-31% YoY) in gasoline prices.



<strong>HOME PRICES IMPROVE ... OR DID THEY?</strong>

Again, some revisionist commentary on the Federal Housing Finance Agency

(FHFA) data that showed a 0.3% MoM increase in July home prices in the U.S.A.

The consensus was +0.5% and June was revised lower to show a 0.1% inch-up.

But the mantra is that prices have put in three monthly gains in a row and for a

market that continues to see the glass as half full that is all it takes.
 
[quote author="awgee" date=1253748444]No_Vas - What do you think the chances are that Bernanke will raise the Fed funds rate if asset prices keep sinking, ie. real estate, MBS, CDS, interest rate swaps, bank loan portfolios, and the only things that increase in price are consumer staples, consumer interest rates, and equities?</blockquote>


Somewhere between 0 and 100%.



<blockquote>Unless I am mistaken, your whole premise is based on the idea that Bernanke will raise rates.</blockquote>


No, my premise is he <em>can</em>. I think rates rising is a lead pipe cinch - what I'm not sure of is the timing. Do you really think he'll keep them this low forever?



<blockquote>Which rates I am not sure. The Fed funds rate? Discount window? Overnight lending? All three?</blockquote>


Depends on how bad it is. Why not?



<blockquote>Why do you think Bernanke will raise the interest rates in his control?</blockquote>


You keep saying will. Nobody thought Volker would do what he did either.



<blockquote>To curb price inflation?</blockquote>


That would be one good reason. Ending the carry trade would be another.



<blockquote>What would that do to the economy?</blockquote>


Kneecap it. Between a rock and a hard place, the fed finds itself. Robini said the same thing last week.



<a href="http://www.rgemonitor.com/roubini-monitor/257690/desperately_seeking_an_exit_strategy_new_roubini_project_syndicate_op-ed">Robini's Op Ed last week.</a>



<blockquote> Do you think it would have deleterious effects on the economy?</blockquote>


For most parts, absolutely. For other parts I think it might be a positive.



<blockquote>And if so, do you think Bernenke is willing to take that responsibility, ala Volker?</blockquote>


I don't have a crystal ball into the hearts of men, but nor do you.



Your argument is Bernake lacks the guts to make the call. I know you like to impune the character of the man, but I don't share that opinion.



In any case, he certainly has all the tools he needs to fight inflation, currency weakness, or the carry trade - and create another nasty recession like Volker.



BTW, Volker's policies to fabricate a strong dollar (while good for the country) nearly broke my dad's farming operation. If Bernanke fails as you hypothosize, it helps my net position. If he follows Volker's footsteps, I'm worse off. Oddly, you're hoping you're right and I'm <em>praying</em> I'm wrong.
 
<strong>The FOMC Statement... Leaves Us Hanging A Bit</strong>

The initial read on the FOMC policy statement is that there is at least one subtle difference from the

August 11-12 policy statement.



1. The Fed repeated that it expects to ?maintain the target range for the federal funds rate at

0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally

low levels of the federal funds rate for an extended period. ?



<strong>Translation: the FOMC has no plans of raising the fed funds rate for the foreseeable future.</strong>



2. There was a subtle change in important language, however. On August 12, the FOMC

stated that it would ?employ all available tools to promote economic recovery and to preserve price

stability.? Today?s statement indicated that ?the Federal Reserve will continue to employ a wide range

of tools to promote economic recovery and to preserve price stability.?

<strong>

Translation: the FOMC is thinking about and possibly preparing to undo some of the extraordinary

monetary policy and credit policy programs now in place. The subtle change in language leaves us to

wonder what might change.</strong>



3. The FOMC reaffirmed its commitment to ?provide support to mortgage lending and

housing markets?(and) will purchase a total of $1.25 trillion of agency mortgage-backed securities

and up to $200 billion of agency debt.? The FOMC indicated that it will wind-down these programs in a

way that is similar to the wind-down of the Treasury outright purchase program and extended the

execution period to ?the end of the first quarter of 2010.?



<strong>Translation: no translation needed. The Fed will complete these programs and wind them down as it

wound down the Treasury program which will be completed by the end of October. .</strong>



So, the important take-aways are that the Fed has no intention of raising the fed funds rate for the

foreseeable future, but is only going to employ a ?wide range of tools? rather than ?all available tools? to

promote economic recovery and to preserve price stability. That leaves us to wonder which tools are

going back on the shelf.

This is the Fed?s way of letting the world know that they are contemplating some changes. It also

leads to speculation, which is what will now happen. Our speculation is that the Fed will begin to let it

be known that it is considering paring back some programs or sopping up some of the ocean of

liquidity in the banking system.



<strong>Translation: we may hear the expression ?reverse repos? uttered by Fed officials between now and

the next FOMC meeting on November 3 &4. However, the Fed does have several options, including

some of the existing programs that fund depository institutions (TAF and swaps with foreign central

banks) , as well as programs to improve the function of markets and financial institutions AMLF, CPFF,

MMIFF and TALF, in addition to Maiden Lane I,II and III, and direct credit to AIG.</strong>



Something will change, and the FOMC wants the market to be prepared.
 
[quote author="EvaLSeraphim" date=1253746479][quote author="no_vaseline" date=1253744849]What's stopping 1979-1983 from happening again?</blockquote>


The fact that Larry Summers has locked Paul Volker in the janitor's closet of the West Wing, for one. ;-)</blockquote>


In what I consider the greatest failing of the Obama administration, Volcker was merely window dressing in a time of economic distress. The campaign used him brilliantly, the administration has not. Seeing him get shoved into the closet was confirmation that Obama wasn't serious about fixing the problem but rather using the problem to leverage his agenda.



No_Vas,



Bernanke is not Volker, and this isn't 1978. Volker was dealing with stagflation, in which inflation was already at double digit rates and interest rates were climbing to match. Bernanke isn't going to raise interest rates anytime soon, but eventually inflation will force his hand. But, since Bernanke seems to be following Japan's example, it may be a decade or more before that happens. Look at Japan's reaction to their own bubble collapse and the ensuing "Lost Decade" and tell me we aren't following the same path, exporting raw materials rather than electronics. Inflation will come, and maybe Bernanke will crush it in time to save the currency, but he's been horribly late on everything so far and he might even think a severe bout of inflation might help the long-term debt problems Obama's putting us in right now. Either way, I don't trust him to pull the trigger until after the problem is obvious.
 
[quote author="Nude" date=1253764347] Bernanke isn't going to raise interest rates anytime soon, but eventually inflation will force his hand. </blockquote>


Consider, the interest on the annual debt is now approx. $500,000,000,000 per year and rising.

Treasuries must be turned over constantly at whatever the new market set rate may be, that market rate being influenced by the Fed funds rate.

The annual deficit is increasing by $1,000,000,000,000 per year at a minimum.

Tax receipts are decreasing.

The Treasury must pay interest on the debt.

If interest rates go up, the T dept must pay more on the debt and must borrow more to pay the interest on the debt.

So, what are the chances that B-52 Ben will raise the fed funds rate?

It's all about the odds. Place your bet.
 
[quote author="Nude" date=1253764347]Either way, I don't trust him to pull the trigger until after the problem is obvious.</blockquote>


Why? Did he welch on a gambling debt or something? Nobody trusted Volker either ? after all, JIMMY CARTER appointed him.



[quote author="awgee" date=1253765933]

So, what are the chances that B-52 Ben will raise the fed funds rate?

It's all about the odds. Place your bet.</blockquote>


100%.



My God, it really is 1980 all over again. This is the same bullshit the goldbugs spewed then.
 
[quote author="no_vaseline" date=1253767488][quote author="Nude" date=1253764347]Either way, I don't trust him to pull the trigger until after the problem is obvious.</blockquote>


Why? Did he welch on a gambling debt or something? Nobody trusted Volker either ? after all, JIMMY CARTER appointed him.</blockquote>


Oddly enough, I provided the answer to that in my previous sentence:



<blockquote>... but <span style="color: red;">he?s been horribly late on everything so far</span> and <span style="color: orange;">he might even think a severe bout of inflation might help the long-term debt problems</span> Obama?s putting us in right now... </blockquote>




Are you being intentionally obtuse?
 
[quote author="Nude" date=1253773418]Are you being intentionally obtuse?</blockquote>


No. I didn't consider it a good reason. Think about it this way:



What would of happened if Bernanke took the most agressive path rather than the one he took? Now we'd be slaughtering him for breaking up the party. He's damned if he do, and damned if he don't.
 
[quote author="no_vaseline" date=1253775433][quote author="Nude" date=1253773418]Are you being intentionally obtuse?</blockquote>


No. I didn't consider it a good reason. Think about it this way:



What would of happened if Bernanke took the most agressive path rather than the one he took? Now we'd be slaughtering him for breaking up the party. He's damned if he do, and damned if he don't.</blockquote>


If he had taken away the punch bowel, I would have lauded him as a hero.
 
[quote author="no_vaseline" date=1253775433][quote author="Nude" date=1253773418]Are you being intentionally obtuse?</blockquote>


No. I didn't consider it a good reason. Think about it this way:



What would of happened if Bernanke took the most agressive path rather than the one he took? Now we'd be slaughtering him for breaking up the party. He's damned if he do, and damned if he don't.</blockquote>


You might be slaughtering him, I wouldn't. I think he and Paulson chose the path that would result in the least amount of pain for the most amount of people... once they realized the scope of the problem. Furthermore, Obama would be in a much greater position today if he wasn't wasting trillions of future tax dollars trying to fund Bernanke's stick save; the end result is a crash anyway. Think about that; trillions spent after the crash, rebuilding and reworking, versus trillions spent before AND after the crash, to meet the same goal. It's the tactic of trying to avoid the pain that leads to unsustainable solutions, making the country ungovernable. I think Bernanke was late, I think he chose the wrong path, I think it was a horrible misallocation of resources that will cost us all dearly, but I do think he's fully aware of all that.
 
[quote author="awgee" date=1253777698][quote author="no_vaseline" date=1253775433][quote author="Nude" date=1253773418]Are you being intentionally obtuse?</blockquote>


No. I didn't consider it a good reason. Think about it this way:



What would of happened if Bernanke took the most agressive path rather than the one he took? Now we'd be slaughtering him for breaking up the party. He's damned if he do, and damned if he don't.</blockquote>


If he had taken away the punch bowel, I would have lauded him as a hero.</blockquote>


He yanks away the punchbowl the first day in 2006. What is the end result that is different than what we have now?



Stocks get pounded overnight.

Homes get decimated overnight.

We never got a bubble in farm and energy commodities, but they get slaughtered too.

Unemployment skyrockets.

Banks are crushed.

Gold goes to 2000 an ounce because the country is in near riots.



About the same except end but Ben didn't cause a panic. So, what would of been the net benefits I missed?
 
[quote author="Nude" date=1253778978] I think it was a horrible misallocation of resources that will cost us all dearly, but I do think he's fully aware of all that.</blockquote>


I'm sure he is. I doubt he views it that way, but he might view it like coming down from a high rise building. The elevator is broken, so you have two choices - hoof it down the stairs, or just jump.



Which do you choose?
 
[quote author="no_vaseline" date=1253779696]

He yanks away the punchbowl the first day in 2006. What is the end result that is different than what we have now?



Stocks get pounded overnight.

Homes get decimated overnight.

We never got a bubble in farm and energy commodities, but they get slaughtered too.

Unemployment skyrockets.

Banks are crushed.

Gold goes to 2000 an ounce because the country is in near riots.



About the same except end but Ben didn't cause a panic. So, what would of been the net benefits I missed?</blockquote>
</blockquote>


We take the pain now. Horrible business and economic conditions for a few years. People with savings buy up the assets at firesale prices. Panda gets his home in Irvine.



But the best part of all, people learn that there is no guaranteed trade.
 
[quote author="ukyo116" date=1253781093][quote author="no_vaseline" date=1253779696]

He yanks away the punchbowl the first day in 2006. What is the end result that is different than what we have now?



Stocks get pounded overnight.

Homes get decimated overnight.

We never got a bubble in farm and energy commodities, but they get slaughtered too.

Unemployment skyrockets.

Banks are crushed.

Gold goes to 2000 an ounce because the country is in near riots.



About the same except end but Ben didn't cause a panic. So, what would of been the net benefits I missed?</blockquote>
</blockquote> People with savings buy up the assets at firesale prices. Panda gets his home in Irvine.</blockquote>


Panda will drink a bottle of soju to that. Let everything crash and burn..... Let's take the pain now! Anything is better than a slow prolonged death.
 
I see. Inflict mass collateral damage and maximize pain so Panda and the other goldbugs can reap the rewards.



After all, that's the American way!
 
Novas,

Seriously, would you rather see a quick severe unthinkable pain in a span of 12 months where America starts to produce and rebuild again or would you rather see a gradual pain escalating for 15 - 20 years? I rather take option #1 any day.
 
[quote author="PANDA" date=1253784230]Novas,

Seriously, would you rather see a quick severe unthinkable pain in a span of 12 months where America starts to produce and rebuild again or would you rather see a gradual pain escalating for 15 - 20 years? I rather take option #1 any day.</blockquote>


Sure! I like food riots as much as the next guy.



The "magic turn" at 12 months is a myth. The only thing remaining after such a colapse is a smoking corpse. It's not the fall that gets you, it's the stop. I'll take walking down that building every day. Sure, it's an inconvience, sure I'll be sore for a while, but it beats the hell out of being DEAD.
 
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