Chicago Fed Letter. “Explaining the Decline in the U.S. Labor Force Participation Rate,” by Daniel Aaronson, Jonathan Davis and Luojia Hu. March 2012, Number 296. (PDF)
Just in time for the next FOMC announcement, via William Banzai:
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Mr. Norris:
It so happens our friend, Thane Rosenbaum, interviewed Larry Summers last night at the 92nd Street Y in New York. When asked about a gold standard, Summers recoiled and shrieked “a gold standard is the creationism of economics!” The crowd got a big chuckle out of that. So you seem to be in popular company with your February 3rd piece, “In a Focus on Gold, History Repeats Itself” (http://www.nytimes.com/2012/02/03/business/in-rise-of-gold-bugs-history-repeats-itself.html?_r=1&ref=business).
But please consider the following:
The stock of money does not need to be managed higher by policy makers to accommodate a growing economy, as Keynesian and Monetarist economists argue and as you seem to agree. Were the money stock (global money stock, not just US dollars) to grow at 1.5% per year (annual growth of the gold stock), all that would mean is that the price level of all aggregate global goods and services could rise only 1.5% per year (more or less). Of course, price levels within the bucket containing all-things-not-money would still shift based on preference. The point is economies could and would grow as much as they should, not as much as they were willing to leverage themselves.
All things equal, the price of gold in paper currency terms rises with paper money growth and falls with unreserved credit growth. Its “exchange rate” to US dollars is simply a function of its relative scarcity, like any other currency exchange rate. It’s not as complicated or as emotional as you and most economists suggest.
All the unreserved credit in the world today (unreserved because there is not enough base money with which to repay it, by a factor of about 7 times for US bank assets only), suggests strongly that global central banks will have to manufacture more of their currencies. Thus, the strong bid for gold today.
In fact, some would argue the current price of gold in USD terms is way too low in the current environment given the enormous leverage already in the system and the amount of money that has to be manufactured in the future to de-lever it. Based on this metric we believe gold is undervalued by as much as five times presently, even without any further Fed printing. It might interest you to know that, using this metric, gold in 1980 became extremely overvalued and so it should have fallen, and obviously it did. Sadly for your readers you did not consider relative value vis-à-vis gold’s proper benchmark – the gap between unreserved credit and base money.
So, there are some secular reasons to like gold at current prices and even to believe in a disciplined monetary system. If the fervency of gold bugs annoys you so much, why not just suggest that your fellow world improvers abolish capital gains taxes on physical bullion and let us crazy gold bugs save in a currency we think will maintain its purchasing power better? We will go away quietly and let you and Mr. Summers amass debt-based “savings”. Maybe a little balance is in order?
Kind regards,
Paul Brodsky & Lee Quaintance
QB Asset Management Company, LLC
Paul Brodsky
QB Asset Management Company, LLC
The History and Rationale for a Separate Bank Resolution Process
Thomas J. Fitzpatrick IV, Moira Kearney-Marks, and James B. Thomson
02.02.12
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Everyone recognizes the need to have a credible resolution regime in place for financial companies whose failure could harm the entire financial system, but people disagree about which regime is best. The emergence of the parallel banking system has led policymakers to reconsider the dividing line between firms that should be resolved in bankruptcy and firms that should be subject to a special resolution regime. A look at the history of insolvency resolution in this country suggests that a blended approach is worth considering. Activities that have potential systemic impact might be best handled administratively, while all other claims could be dealt with under a court-supervised resolution.
Lehman Brothers’ filing of a petition to reorganize under Chapter 11 of the Bankruptcy Code in September 2008 was a watershed event in the recent financial crisis. The ensuing market turmoil led to heated debate about whether bankruptcy is an appropriate mechanism for resolving the insolvency of a systemic financial company. On one side of this debate are those who believe that with some adjustments the judicial process of bankruptcy is a viable option for handling the failures of most types of financial firms. On the other side are proponents of an administrative process akin to that used to resolve insured depository institutions.
In one sense, the Dodd–Frank Consumer Protection and Wall Street Reform Act of 2010 settled this debate. Notable among its reforms is the Orderly Liquidation Authority, a process for resolving systemic nonbank financial companies that parallels a Federal Deposit Insurance Corporation (FDIC) bank receivership. In another sense, Dodd–Frank has fueled further debate: It has made orderly liquidation an exceptional power by mandating that financial companies create and maintain plans for resolution under the Bankruptcy Code; it has also ordered studies of possible reforms to the Code that would allow for more orderly resolution of systemic financial companies through bankruptcy.
Government policy for resolving insolvent financial institutions is at a crossroads. There is little dispute about the importance of designing and implementing a credible resolution regime for systemic financial companies. However, there is considerable debate about the best method for doing so. When deciding between bankruptcy and an FDIC-like administrative process to resolve nonbank financial companies, it is natural to ask why bank failures were ever handled differently. Today, there seems to be general agreement that banks’ payments-related functions (from issuing bank notes and taking checkable deposits to clearing and settling payments) require special treatment, but it was not always so. This Commentary seeks to inform the debate by examining how resolution policies for failed banks evolved in U.S. history.
The United States did not enact a permanent federal bankruptcy code until the end of the nineteenth century. Although there had been many attempts to enact such a code, these were either defeated in Congress or, if enacted, were soon repealed. Hence, for much of U.S. history, banking and commerce operated in a world without any federal bankruptcy code. For corporations, including banks, resolution had to take place by other means.
Before enacting the National Currency Act of 1863 and the National Banking Act of 1964 (“the Acts”), the federal government was not in the business of chartering banks (the First and Second Banks of the United States being notable exceptions). Banks were state-chartered corporations, subject to oversight by the state in which they operated; most were designed to self-liquidate when their charters expired, generally after 20 years. However, banks were different from other corporations in one particularly important way: they issued bank notes, which were an important part of the nation’s money supply. Deposit-taking was another vital activity of banks during this era, but failure to redeem bank notes was the primary driver of failed-bank resolution policies.
Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.
His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.
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“You’re wrong. She is a phony. But on the other hand you’re right. She isn’t a phony because she’s a real phony. She really believes all this crap she believes. You can’t talk her out of it…. She’s nuts.”
-Of Holly Golightly, from Truman Capote’s Breakfast at Tiffany’s (1958)
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“While central planning may no longer be a credible form of economic organization, the intellectual battle for its rival – free-market capitalism – is far from won.”
“Anti-capitalist virulence appears strongest from those who confuse “crony capitalism” with free markets. Crony capitalism abounds when government leaders, usually in exchange for political support, routinely bestow favours on private-sector individuals or businesses. That is not capitalism. It is called corruption.”
-Former Federal Reserve Chairman Alan Greenspan,
GREENSPAN, who centrally controlled and underpriced the most over-leveraged interest rate in the world for 18 years and is now cashing in like a reality TV celebrity. Financial Times, January 30, 2012, under the fanciful title: “Meddle with the Market at Your Peril”
Here’s my (2nd) Yahoo Finance video from yesterday:
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First video is here A Housing Bottom Is Nowhere In Sight; there’s a nother in the queue
click for updated futures
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After a blistering open to the year — markets gained ~5% in the first 3 weeks — this past week was kinda flat — S&P added one point (not % — but a point) while the Dow lost 1/2%. Nasdaq, dragged upwards by Apple might Quarter, gained 1%.
The key question here is whether this is a pause that refreshes, a temporary break in the upwards action to consolidate recent gains, or whether the long awaited topping out has occurred. Lots of folks seem to be voting massive double top — from the 87 year old Joe Granville to the younger traders, there seems to be a groundswell of people thinking the market rally is finished.
Earnings so far this Q have disappointed. The January rally was merely an excess cash deployment, in their opinions, and is destined to fail.
On the other side are those people who believe the economic data is slowly improving, and its foolish to fight the Fed. Doug Kass believes this to be a consolidation.
Markets have been ignoring bad news out of Europe, not been disturbed by the raucous US elections, and mostly shaking off earnings news — is it denial, an eventual eureka moment or priced in? I suspect its none of the above — rather, the trader anticipation of a moon blast on the next QE announcement. Earnings? Fundamentals? PaShaw — its all about the power of the Fed’s mighty printing press. Indeed, in the post 2007-09 snapback rally — spitting distance from up 100% off of the SPX lows made March 2009 at 666 — its been a money loser to fight the Fed.
As to whether (or when) we top out, I have no opinion as of yet. I prefer to see more evidence that the rally is over before changing portfolio weightings. Otherwise, we are merely guessing.
More on this to come . . .
The Transparency Trap
John Mauldin
January 28, 2012
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This week we take a brief pause in our series on the choices facing the developed world to look at some items that are catching my attention. We will get back to the US next week, as somehow I think we will not solve our problems between now and next Friday, and there will be plenty left for us to talk about. So today we look at the “shift” in Fed policy, and at the balance sheets of central banks, US GDP, Portugal and the ECB, the LTRO policy, and yes, there’s even a tidbit on Greece. Plenty of ground to cover, so with no “but first,” let’s get started.
The Fed announced this week that it will keep rates low until 2014. Interest rates responded by getting even flatter. This policy change has caused a lot of negative press, for some good reasons, but I want to offer a somewhat different take on their motives.
Telling us that rates will stay low for another three years has a lot of negative implications. First, it says that the Fed does not expect a recovery of any significance during that time (more on this week’s GDP numbers further on). Second, it tells any individual or business that there is no reason to hurry and borrow money to get lower rates. You can wait and see how things turn out before you decide to act.
Comstock Partners minced no words in their scathing criticism:
“In our view the Fed’s new policy is an act of desperation rather than something to celebrate. The FOMC has used all of its conventional weapons and a lot of unconventional ones and is essentially out of ammunition. The banking system is swimming in excess reserves that it is not using—-adding more won’t make much of a difference. This is a classic liquidity trap where further easing will not be much help. The stock market strength assumes that the economy is getting stronger and that company earnings will remain at elevated levels. We think that this will not be the case, and that the market is subject to substantial downside risk.”
I agree with their sentiments and conclusions, but I think the Fed is in more than a liquidity trap. For lack of a better term, let’s coin one and call it a “transparency trap.” The Fed and the FOMC do not create their policies in a vacuum. The individual members talk to business leaders at length every week, and their staffs are also seeking out opinions and reactions. While they may not talk to you and me, they are aware of the reactions to their positions. Let’s take that as a given. These are not men and women who are easily pushed into a position. They get where they are by being able to forcefully take a position and push for their policies. We may not like their positions, but they put some thought and a lot of work into making them. Frankly, it is a damn hard job. No matter what they do, they will make a lot of people upset. And this week is a case in point.
Ben Bernanke has been quite open in that he wanted a more transparent Fed. He wanted explicit inflation targets long before he joined the Fed. He wanted more communication and openness from the FOMC. Many in the media and elsewhere lauded those sentiments, including me, as the more we know about their thought process, the better we can all plan.
However, there were others who said that the Fed needed to keep theirs cards closer to their chests. Showing too much of their inner reasoning could mislead as well, as policies could change and the Fed should not feel locked into any one position if the underlying circumstances shifted. There should be an element of mystery, they maintained. Some former members of the Fed were very outspoken in their desire to not increase the transparency of the Fed. As with sausages and laws, we simply do not want to know too much about what goes into making Fed policy, they asserted
But slowly, Bernanke has put his stamp on the Fed, including his views on transparency. His speeches and presentations are far more comprehensible than the foggy pronouncements of Greenspan. He has started doing press conferences. And with this meeting, he has persuaded the 17 members of the FOMC to offer projections about the economy – in this case, where they think rates will be for five years into the future.
The headlines talked about the Fed keeping rates flat into 2014, but if you look at their median forecast, they expect rates to rise by all of 0.5% at some point in 2014. And for the record, here are the rest of their more significant forecasts:
“The Fed knocked down its forecast of economic growth a few notches for the entire forecast period (see table below). The Fed sees the economy growing around 2.2%-2.7% in 2012. The Blue Chip consensus forecast of growth in the US is 2.2% on an annual average basis as of January 2012, while the IMF projects growth of 1.5% for the United States in 2012 on a fourth quarter to fourth quarter basis.
“The central tendency of the unemployment rate for 2012-2014 was lowered but the longer run projection was left intact. The unemployment rate is expected to be around 8.2% to 8.5% by the end of the year, which is different from the Blue Chip consensus of 8.5% (determined by a survey taken prior to the publication of the December employment report, most likely to be revised down). Inflation is projected to below the Fed’s target of 2.0% until 2014. With regard to inflation, Bernanke formally indicated that 2.0% inflation is the Fed’s target rate and this rate as being consistent with the Fed’s dual mandate.” (Asha Bangalore, Northern Trust)
All in all, not a very upbeat group. Given their views, it is no wonder they expect rates to stay low. And thus we have the transparency trap. They are now telling us what they really think, something that most people in most places wanted only a short while ago. And we see the 17 individual forecasts, so we can get a sense of the range of opinion, which is quite wide, actually. Look at the following graph, which shows us when the members of the FOMC expect rates to finally begin to inch up.
Note that six members expect rates to rise within the next two years and four expect rates to be flat into 2015, with two members thinking rates will not rise until 2016. And over whatever they define as the “longer term,” they expect the Fed Funds rate to be 4.25%. (Which causes me to mangle that song from the children’s movie classic, Snow White: “Some Day My Price Will Come.”)
(You can see all the projections in glorious detail at http://www.federalreserve.gov/monetarypolicy/fomcprojtabl20120125.htm . )
If we want to know what they think, and they tell us, are we then going to shoot the messenger? We asked, they delivered. If they gave us those projections and did not change their interest-rate projections from the last meetings, they would be subject to ridicule, because they did not say in the statement what they really believed.
In a very real way, they were forced to say they expected rates to be flat for 2-3 years. To say anything else would have been rather pointless, at best, and subject to even more intense criticism at worst. Once they opted for transparency, they were forced to take the position they did. Put this in the category of “be careful what you ask for, because you may get it.”
Now, take note. And I do not mean this as a specific indictment of Fed economists and forecasters. This goes for all of us who dare venture a thought about the future.
There is a natural tendency to take current conditions and project them forward. Which is why stock analysts who forecast earnings are so predictably bad. And the all-star team of blue chip economists (in the US) have yet to predict a recession, even when one has started, let alone in advance! Once you rely on models, you are doomed to error. I have read studies that show analysts are not even as accurate as one would expect from simple random selection.
I think we should take these Fed projections as more of a curiosity, for at least the next two years. In two years we will have 16 data points (8 meetings a year) which will show us some of the evolution of their thinking, and that will be very interesting.
For what it’s worth, if someone had asked me, I would have said that rates will be flat for a very long time. We inhabit a deflationary, deleveraging reality. That suggests lower inflation. I have written at length why unemployment will be higher than we are comfortable with; it is just a product of the current environment and simple math. To see unemployment come down we need to see growth in the 3.5% range, and our next topic will show us why we are not even close to that number.
It is irresponsible for the Fed to state that it will keep rates exceptionally low through at least late 2014. No one, least of all the misguided seers at the Fed, knows what inflation, the economy, the dollar, etc. will be in coming quarters, let alone two years.
Please recall that we mockingly said that the Fed would in the future announce that it would keep rates exceptionally low through 2014, then through 2015, then through infinity.
The reason for the ‘late 2014’ verbiage is the Fed wanted to throw a bone to The Street because it did not announce the much-desired QE 3.0.
Stocks and commodities rallied on the ‘late 2014’ clause because the usual suspects, as they have for the past two years, spin every FOMC Communiqué as an indication of imminent QE 3.0 implementation.
The Fed stating that it will keep interest rates exceptionally low through 2014 is a symbolic act, like Warren Buffett stating that he would like to pay more taxes. The Fed, like most of the known world, has downgraded its economic assessment for 2012.
Information received since the Federal Open Market Committee met in November December suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to be increasing less rapidly has slowed, and the housing sector remains depressed. Inflation has moderated since earlier in the year been subdued in recent months, and longer-term inflation expectations have remained stable…
The Committee continues to expect a moderate pace of expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.
Does anyone with a modicum of sense believe that the risible ‘late 2014’ assertion will compel business executives to suddenly go into economic expansion mode? PUHLEASE!
The Fed unwittingly has demonstrated its effeteness. In the face of a slowing global economy all the Fed can do is provide a symbolic pledge and maintain ‘financial repression’ for three more years.
Bonds soared on the Fed’s economic downgrade and absence of QE 3.0 implementation or pledge.
If the economy is stumbling with exceptionally low [record] rates for the past two years, why should the economy improve if policy remains the same, no matter how long it is extended into the future?
Insanity is doing the same thing over and over again, but expecting different results. – Albert Einstein
One thing that the Fed did accomplish with its dovish rhetoric is it supercharged commodity prices. Gasoline prices, which are extremely politically sensitive, are at an all-time January high. When traders and commercials pour into gasoline for the drive season, gasoline could reach new all-time highs.
Just like in 2011, commodity inflation early in the year, due to the Fed’s insane policies, crushed the economy and fomented civil unrest globally.
What did Einstein quip about ‘insanity’?
All Central Bank Balance Sheets Are Exploding Higher, Or Engaged In QE
The degree to which central banks around the world are printing money is unprecedented.
The first eight charts below show the balance sheets of the largest central banks in the world. They are the European Central Bank (ECB), the Federal Reserve (Fed), the Bank of Japan (BoJ), the Bank of England (BoE), the Bundesbank (Germany), the Banque de France, the People’s Bank of China (PBoC) and the Swiss National Bank (SNB). Noted on the charts are significant events or growth rates.
Shown is the size of each respective balance sheet in its local currency. Note that all are exploding higher as every chart goes from the lower left to the upper right. Most are still making new all-time highs. If the basic definition of quantitative easing (QE) is a significant increase in a central bank’s balance sheet via increasing banking reserves, then all eight of these central banks are engaged in QE.
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Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof. —John Kenneth Galbraith
Knowing that the vote over the weekend in Greece was really a referendum on Euro membership, a majority of the Greek Parliament said yes to staying. European Finance Ministers meet again on Wednesday to solidify the 2nd bailout package for Greece at the same time hopefully a deal is consummated between Greece and its creditors this week. The Greek 14.5b euro bond that matures on March 20th is up by 2 pts. The optimism that all will be completed and contained AGAIN to Greece has yields lower in Portugal, Spain and Italy. The iTraxx Financial Index is also narrower by...
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