Mish's Global Economic Trend Analysis |
- Is the Fed in Control? If So, Control of What?
- Compromise to Nowhere; Germany Mulls Greek Debt Buyback; More Haircuts Coming?
- Drumbeat of Weaker Revenues
Is the Fed in Control? If So, Control of What? Posted: 21 Oct 2012 08:56 PM PDT Reader Richard is wondering about a statement I made in Problem is Demand: First IBM, then Intel, now Google. Specifically Richard questions my statement "In spite of what everyone seems to think, the Fed is not really in control of much of anything". Richard writes ... Hi, MishNo Echo Bubble in Housing Hello Richard, for starters, there is no echo real estate bubble. Home sales are at depressed levels, financial institutions are still overloaded with hugely underwater properties, and prices have bounced a bit in some areas, by 5-10% bounces following 50-60% declines hardly constitutes an echo bubble. Had Richard said the Fed created an echo bubble in stock prices, I would have agreed. Let's step back a second and look at the three primary things the Fed wants to accomplish. Three Things Fed Desperate to Accomplish
The Fed has failed at all three. Arguably, credit has risen, but nearly all of the rise is student loans, making debt slaves out of kids in the process, something the Fed certainly does not want to accomplish. In September 2011, Ben Bernanke said he was surprised by weak consumer spending. I wrote about it in Bernanke, a Complete Dunce, "Puzzled by Weak Consumer Spending" In March of 2012, Bernanke said he was puzzled over jobs. I wrote about that in Bernanke Puzzled Over Jobs, Cites Okun's Law; Six Things Bernanke is Clueless About On October 15, the president of the New York Fed complained about the "poor performance of the U.S. economy" as well as "inadequate aggregate demand". For discussion, please see Recovery, Monetary Policy, and Demographics: NY Fed vs. Mish Analysis How Can The Fed Be In Control When ... How can the Fed be in control when it cannot spur jobs, it cannot spur housing, it cannot spur credit, it remains puzzled over numerous things, and in fact launched QE III in a moment of Panic! To be sure the Fed has taken credit for the surging stock market. However, in terms of the Fed's real goals, this is like attempting to cure lung cancer and failing, but by happenstance removing a wart from a big toe and declaring success. The Fed is not in control, it is only an illusion. One other person commented on this recently. Please consider the Hoisington Third Quarter 2012 Review by Lacy Hunt. The article discusses QE1, QE2, QE3, demand curves, commodities, and numerous other ideas in a six-page PDF. The article is well worth a read in entirety, but here are a few key snips ... While prices for risk assets have improved, governments have not been able to address underlying debt imbalances. Thus, nothing suggests that these latest actions do anything to change the extreme over-indebtedness of major global economies.Fed Without Options Lacy Hunt concludes with ... For Fed policy to improve real GDP, actions must be taken that either (1) shift the entire demand curve outward (to the right), or (2) do not cause an inward shift of the AS curve that induces an adverse movement along the AD curve. Accordingly, the Fed is without options to improve the pace of economic activity.Bernanke says he is not out of options, so Lord only knows what he may try. However, Lacy Hunt's statements are accurate. Simply put, the Fed is without options that will do any good for the economy. Control of Stock Market? Interest Rates? What? The Fed is not in "control" of the stock market. Creating echo bubbles does not constitute control. Bubbles, by definition, pop. If you think the Fed is in "control" of interest rates, you need to reconsider that as well. Certainly the Fed has distorted the bond market and yields, but most likely in the direction of the trend. Regardless, distortions do not constitute "control" no matter how it appears in short-term periods. Given the folks at Hoisington and other small select groups of individuals and bloggers know as I do, that Fed "control" is nothing more than a mirage, I need to make a slight change in my statement. Here is the revision: In spite of what [nearly] everyone seems to think, the Fed is not really in control of much of anything. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com "Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More |
Compromise to Nowhere; Germany Mulls Greek Debt Buyback; More Haircuts Coming? Posted: 21 Oct 2012 08:43 AM PDT Late last week, following a bitter feud between German Chancellor Angela Merkel and French President Francois Hollande, a compromise of sorts was reached at the latest summit. Please consider Berlin and Paris Compromise on Bank Oversight. European leaders have reached agreement on the roadmap to a banking oversight regime in the euro zone. Following a public back-and-forth between German Chancellor Angela Merkel and French President François Hollande, the 27 European Union heads of state and government on Thursday night found a compromise at their two-day summit in Brussels.Compromise to Nowhere Bear in mind last June the Euro leaders agreed to do this by the end of this year. Now the target, minus details, "will not come until later". The oversight regime will be introduced "in the course of 2013." Is "introduced" the same as "implemented"? The more important question is "Does it even matter". Catch A Falling Knife In his Weekly T-Report Peter Tchir sums up the situation nicely. I would love to be able to say that Europe is fixed. It isn't and this particular summit was particularly disappointing. They announced some vague plan to plan a bank supervisor. I still don't understand why people really think a bank supervisor would change anything. Just think about the Spanish bank bailout. Money was supposed to be available in July, then August, then September and as far as I can tell, not a single distribution has been made.Meaningless Plans Roll On Slowly but surely Greek bondholder losses approach 100%. There have been several haircuts already and now the German Finance Ministry Mulls Yet Another Debt Buy-Back Scheme. Germany's Finance Ministry is considering a debt buy-back as a possible way of reducing Greece's huge debt pile which threatens to rise well above a target level of 120 percent of GDP by 2020, according to German news magazine Spiegel.Ho Hum Would bond holders agree to another haircut? Even if they did, would it matter? In a report earlier this week Tchir estimated a buyback would save Greece less than a billion euros a year. His math "Greece pays 2% on these bonds and the first maturity is 2023. Other than meeting some artificial Troika target, this plan has no meaningful impact. Greece will have to borrow money from the ESM to pay for these bonds. Depending on the price they pay and the coupon on the new debt, they will likely receive cost savings of far less than €1 billion per annum. If the average price paid is 50% of par (seems likely once the deal starts) and the borrowing rate on the ESM loans is 2%, the cost savings would be €600 million." There's your answer: no it would not matter. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
Posted: 21 Oct 2012 12:06 AM PDT For the first time in three years, US corporations are poised to report lower sales. From technology to fast food giants, Falling Revenue Dings Stocks America's largest companies are on track to report lower quarterly sales for the first time in three years, a broad and gloomy verdict on the health of the global economy.Belief in the Fed's ability to pull rabbits out of its hat is about the only thing this market has going for it, even though close scrutiny shows the Fed is not really in control of much of anything. Stocks are priced beyond perfection, for growth that will not happen. When this matters no one knows, but it will matter. Unless it's different this time (and it won't be), real returns in equities do not look good going forward. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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