Tag Archives: interest rate

Bits and Pieces – 20180423, Monday


Jim Quinn has just published WINTER IS COMING (PART THREE), his third essay in a series based on the book The Fourth Turning by Strauss & Howe. It explains how the state of global political unrest is the end state of the current fourth turning.

I continue to make minor changes in the organization of the structure of these posts.

The Fed’s Thinking and Policy Explained in Two Sentences

Our friend JR sent us this quote from the new Fed chairman Janet Yellen on Fed policy:

You know, a lot of people say this (asset buying) is just helping rich people. But it’s not true. Our policy is aimed at holding down long-term interest rates, which supports the recovery by encouraging spending. And part of it comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.

We are struck with admiration – and we sincerely mean this. We had 18 1/2 years of Alan Greenspan and people are still trying to figure out what he said. Eight years of Ben Bernanke gave us a lot of academic theory applied in real-time to the economy without any understanding of the outcome. Then the new Fed chairman, in two sentences, explains in plain, clear English what the Fed has been doing all along. Let’s step through it.

Of Elephants and Black Swans

Consider the parable of the three blind men and an elephant. As Wikipedia explains it (emphasis added):

The story of the blind men and an elephant originated in the Indian subcontinent from where it has widely diffused. It has been used to illustrate a range of truths and fallacies; broadly, the parable implies that one’s subjective experience can be true, but that such experience is inherently limited by its failure to account for other truths or a totality of truth.

 Also consider the notion of a black swan (BS) event introduced by Nicholas Taleb. As Wikipedia describes it:

The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. … “black swan theory” refers only to unexpected events of large magnitude and consequence and their dominant role in history.

Summarizing these two notions:

  1. Our knowledge of anything in the world is necessarily and always partial;
  2. this knowledge as far as it goes may or may not be true;
  3. there can be events that come to pass that while being known, are considered to be so improbable they are not taken into consideration in any planning or action;
  4. these improbable events may have huge consequences; and
  5. not all BS events are known. (consider that black swans existed but were unknown before their discovery in Australia by early explorers.)

We read daily, material from a number of respected sources and by very smart people. In particular, on Zero Hedge this morning, we read the essay by Michael Snyder of The Economic Collapse blog, titled Dent, Faber, Celente, Maloney, Rogers – What Do They Say Is Coming In 2014? In it he provides quotes from 14 respected economic experts about what they believe is coming in 2014 and just beyond. This got us thinking. The thoughts of 14 of the most astute blind men, taken together, should give us a better understanding of the elephant we live with and perhaps a glimpse of the next black swan.

Canada: I heard the sound of a thunder, it roared out a warnin’ …

The OECD, in its current General assessment of the macroeconomic situation of the global economy, gives 2 Tables, A1a and A1b, titled Indicators of potential financial vulnerabilities. These tables list 12 categories of macroeconomic activity that could warn of financial vulnerability. They are:

  • Potential GDP growth rate – actual GDP growth rate differential, 2012
  • Actual unemployment rate – NAIRU differential, 2013 Q2
  • Current account deficit , 2012 [1]
  • Relative unit labour cost, 2000Q1-13Q2 [2]
  • Household gross debt, 2012 [1]
  • Non-financial corporation gross debt, 2012 [1]
  • Real house prices, 2000Q1-13Q2 [2]
  • Core Tier-1 capital required to reach 5% of assets in selected banks [1]
  • Nonperforming loans to total loans, latest
  • Financial corporation gross debt, 2012
  • Headline government budget deficit, 2012
  • Gross government debt, 2012
  • Real 10-year sovereign bond yield-potential GDP growth rate differential, 2013Q3

Flash Point: ****-For-Brains Bernanke

The place holder “****” may be filled in by you , dear reader, allowing you to accord Ben Bernanke the degree of respect that you think he deserves. Each “*” is the place holder for a string of characters from 0 to n where “n” is an arbitrary number. So some words that would fit these rules are: ‘mush’, ‘good’, ‘genius’, ‘outstanding’, ‘eh?’, and so on. The context for assessing respect may be based on the article in the Irish Times, Bernanke warns banks on excessive risk. In particular, this quote:

In a speech in Chicago, the US Federal Reserve chairman said he was watching for signs that banks were resorting to speculation [i.e. risk] because of low interest rates, highlighting the danger that easy monetary policy could inflate new bubbles in asset prices.

Bernanke, has done two things of note. He has driven interest rates to record lows, farther out the yield curve than any of his predecessors. In fact, real interest rates (adjusted for inflation) are negative for short term maturities and close to zero for longer term maturities. This has forced investors, whether they be banks, retail investors or institutions, to buy riskier assets and equities to try and create some positive return on their money.

The second thing that Bernanke has done is flood the market with liquidity, much more than the market could digest since most of it remains locked up in bank reserve accounts at the Fed. Some of this liquidity is undoubtedly driving the stock market to record highs, a fact confirmed by the market’s divergence from economic fundamentals.

In other words, Bernanke has destroyed savers and forced investors of all stripes to chase risk to try and get some return on their money. This guy has the unmitigated gall – we’ve not used this term before, but the alternative is a string of epithets – to create a situation and then blame the logical outcome on the very people whom he has forced his policies upon. Bernanke is blowing bubble after bubble – bonds, stocks – and he can’t even see it. This guy has “***”-for-brains.

Flash Point: The Fed is Dead!

We have written extensively on the Fed’s broken interest rate policies which along with propaganda (the use of  communications such as FOMC minutes and members’ speeches,  to influence investors and markets), are the main tools the Fed has to affect the economy. In short, lower interest rates encourage borrowing which stimulates the economy through added consumption (spending) and business investment. This traditional tool of using the Federal Funds Rate to control short term borrowing costs, broke in 2009 when effectively the zero rate lower bound was reached (ZIRP).

Unable to stimulate spending by this means, the Fed began a series of quantitative easing (QE) measures to bring down interest rates right across the yield curve to the 30-year long bond. The latest, dubbed QE3, was supposed to increase the downward pressure on long-term rates giving investors money to buy stocks, stimulating company investment.

In an article today titled QE Backfires as Dividend Quest Usurps Growth: Cutting Research, Bloomberg explains how this is not working as planned. Instead of increasing their debt load to invest in high-risk stocks with no return, investors are choosing to invest in the stocks of low-risk blue-chip stocks that pay a dividend and that by buying back their stock, raise the price giving investors a capital gain.

In driving real interest rates negative at the short end of the curve and well below 1-2% at the long end of the curve, the Fed has forced investors into equities to get some minimal positive return. It’s just that the investors didn’t quite go where the Fed wanted them to in terms of equities.

So QE has reached the end of its effectiveness leaving the Fed with what? The only question now is whether any further flatulent announcements and policy proposals are the product of a bad case of monetary overindulgent indigestion or the emissions of a rotting corpse. The Fed is not smart enough to realize that the problem is that of a debt cycle and not a business cycle. The consumer on the other hand, once again demonstrates wisdom as he manages his wealth.

Flash Point: Liquidity Traps; Lie Traps

In his Jackson Hole speech, (see our posts: The Hole in Jackson Hole, Flash Point: What We Missed the First Time Round), Bernanke reported on the two tools that the Fed has at its disposal and the various implementations and policies that they have used in this crisis. The first set of tools are designed to affect interest rates. The second set of tools are their communication programs used to affect market psychology. We will argue that the first set of tool have resulted in a liquidity trap. We will argue that the second set of tools have created a lie trap.

What’s In Bernanke’s Toolbox?

We got this message from out friend JR:

“Bernanke said the Fed has three tools left in the box to promote growth. He can reduce the rate the Fed pays on reserves banks deposit overnight with the Fed. He said the Fed can communicate its intentions differently. And he said further asset purchases could happen.”

Thoughts? I think we already discussed Door #1. Door #2 – well, ok… he can wear a clown suit in his next speech. That might be more effective; Door #3. That’s the Lusitania door. Or maybe the Bismark. You know, it lost its rudder, then finally got blown out of the water.

Rather than limit our reply to an email, we thought we would share it with others.

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