| Bernanke Admits Targeting Stock Prices Posted: 03 Nov 2010 07:42 PM PDT Everyone knew the Fed was attempting to lift stock prices. Today Bernanke admitted it. Please consider Bernanke Says New Purchases Should Aid Growth With Lower RatesFederal Reserve Chairman Ben S. Bernanke said resuming large-scale asset purchases should boost economic growth through lower borrowing costs and higher stock prices and that concerns about the strategy are "overstated."
"This approach eased financial conditions in the past and, so far, looks to be effective again," Bernanke said today in an opinion article for the Washington Post released hours after the Fed announced the $600 billion of Treasury buying through June in a second round of unconventional monetary stimulus.
"Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action," Bernanke said. "Easier financial conditions will promote economic growth."
Bernanke said that low and falling inflation indicates that the economy has many idle resources and that further monetary policy efforts will not cause the economy to overheat. Overheat Where?It might not cause our economy to overheat, but it is creating one big mess for emerging markets such as Brazil. Money is pouring in as the dollar sinks. Inflation in China is massive. What the Fed Did and WhyInquiring minds may wish to read Ben Bernanke's Washington Post Op-Ed What the Fed did and why: supporting the recovery and sustaining price stability. Here are a few snips... Notwithstanding the progress that has been made, when the Fed's monetary policymaking committee - the Federal Open Market Committee (FOMC) - met this week to review the economic situation, we could hardly be satisfied. The Federal Reserve's objectives - its dual mandate, set by Congress - are to promote a high level of employment and low, stable inflation. Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10 percent, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer. The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills.
Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. Although low inflation is generally good, inflation that is too low can pose risks to the economy - especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation.
With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. ....
The Federal Reserve cannot solve all the economy's problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector. But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation. Effective Again? In What Way?
There has been little job creation, no increase in R&D, no increase in bank lending. The only case for stating "effective again" (before round II even started I might add) is stock prices, commodity prices and junk bonds are all up. How long can that last with no benefit to the real economy? Federal Reserve Cannot Solve Any ProblemsBernanke said the Federal Reserve cannot solve all the problems on its own. More realistically, the Fed cannot solve ANY problems on its own (or for that matter with the help of anyone else). The problem is "The Fed is the Problem"The Bernanke and Greenspan Fed have blown one bubble after another. Now the Fed is openly pursuing another bubble in stocks. However, the credit bubble and housing bubbles are bubbles of last resort. Both created jobs (artificially of course), then we crashed and the jobs vanished. Fresh new bubbles in stocks, junk bonds, or commodities will not create any jobs. In fact, rising commodity prices based on speculation and misguided attempts to force the CPI higher will cost jobs. The reason is so obvious that only a monetary crank trapped in academic wonderland cannot see it. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Quantitative Easing Graphs, US, UK, Japan Posted: 03 Nov 2010 04:55 PM PDT The Financial Times has an interesting set of Quantitative Easing Graphs depicting central bank assets as well as assets as a percent of GDP, by country. Here is one graph from the article.  By that comparison, the Fed has room to grow, and grow it will, whether it makes any sense or not (which of course it doesn't). Japan offers proof of the silliness of QE. So does common sense. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| QEII Announced, Fed Set to Buy $600 Billion in Bonds, Reinvest $250 Billion More; Fed Micromanaged Economy to Oblivion; No Miracles Coming Posted: 03 Nov 2010 12:13 PM PDT As expected, the Fed announced a "modest" $600 billion second round of Quantitative Easing. Estimates rated as high as $2 trillion. Please consider the Fed's Statement Regarding Purchases of Treasury SecuritiesOn November 3, 2010, the Federal Open Market Committee (FOMC) decided to expand the Federal Reserve's holdings of securities in the System Open Market Account (SOMA) to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. In particular, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.
The FOMC also directed the Desk to continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities. Based on current estimates, the Desk expects to reinvest $250 to $300 billion over the same period, though the realized amount of reinvestment will depend on the evolution of actual principal payments.
Taken together, the Desk anticipates conducting $850 to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases. QEII DurationThe Fed is going to be stuck with this garbage on its balance sheet for a long time as the following table shows.  That table explains the Fed's exit plan: None. The Fed will hold 29% of the garbage it buys for at least 7 years. The Fed may hold all of it to duration. Don't worry, the Fed does not have to mark-to-market any of these holdings, regardless of what happens to interest rates. Doubts PersistMarketWatch reports Fed to buy $600 billion in bondsThe Federal Reserve pledged on Wednesday to start a controversial new billion bond-buying spree to rescue the economy from its current doldrums.
The Fed said it would buy up to $600 billion in long-term Treasurys until the end of June 2011, about $75 billion this month, in a strategy called quantitative easing
This is the second time the Fed has engaged in quantitative easing, as it snapped up $1.7 trillion in mostly housing-related assets December 2008 and March 2010.
The Fed purchases are designed to bring down yields on government bonds believing that lower rates could always give the recovery a boost.
More broadly, the Fed wants to prompt private businesses and investors to begin to act with more confidence and help get the economy's juices flowing.
"They are trying to break through the fear," said J.P. Morgan Chase economist James Glassman.
Doubts persist about whether the plan will work, but many feel the Fed had little choice but to act. Doubts? What Doubts?There is little doubt, at least in this corner, that the plan cannot possibly work. Corporate borrowing costs are the lowest in history and that hasn't spurred hiring. Will another quarter of a point lower matter? Will QEII even lower rates that much? Simple explanations as to why QEII will fail are best: "Money's Already Quite Cheap" With mortgage interest rates at all time lows, is this supposed to help housing? Why? It is sad but true economic thinking these days that the "Fed had to do Something". Why does it make sense to do something, just for the sake of doing, when it should be crystal clear that doing just adds to problems down the road. Fed Micromanaged Economy to OblivionThe Fed has clearly micromanaged this economy to oblivion. Greenspan's experiment short-circuited the 2001 recession but the expense was the biggest housing bubble in the history of the world, not just in the US, but globally. A global recession soon followed. Now on misguided calls to "do something" the Fed is blowing a bubble in commodities that cannot possibly help margin strapped small businesses. An excerpt from $30 Billion Offer No One Wants - Small Businesses Hit by Deflation will show why. NFIB Small Business Trends
Inquiring minds are taking a look at NFIB Small Business Trends for September.
INFLATION
The weak economy continued to put downward pressure on prices. Seasonally adjusted, the net percent of owners raising prices was a negative eight percent, a four point increase from July. August is the 21st consecutive month in which more owners reported cutting average selling prices that raising them.
COMMENTARY
The Index has been below 93 every month since January 2008 (32 months), and below 90 for 25 of those months, all readings typical of a weak or recession-mired economy.
Inflation? Not a threat. Far more owners have cut prices than raised them for 21 months in a row. Deflation? It certainly feels that way to a quarter of the owners reporting price declines for the goods and services they produce and sell. QEII, QEIII, QEIV, QEVHow many more rounds of QE will there be before Bernanke gets the message? 2? 3? 4? Is Bernanke capable of getting any message short of a bond market revolt? Fed Uncertainty Principle The Fed Uncertainty Principle corollaries #2 and #3 provide the answer. Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Corollary Number Three:
Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem. Expect No MiraclesUnless a miracle occurs, consider QEII as a down payment. Meanwhile the important fact right now is benefits are set to expire on 2 million collecting extended unemployment benefits. Lower interest rates (assuming that even happens) will not help those 2 million one iota. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| LPS Mortgage Monitor Shows 7 Million Noncurrent Loans, 2 Million Homes in Foreclosures, Deteriorating Conditions Posted: 03 Nov 2010 03:25 AM PDT The LPS Mortgage Monitor has a nice series of 33 slides that shows delinquent loans had stabilized in the first half of 2010 but new problem loans are once again picking up. Over 4 million homes are 90 days late or in foreclosure. Total Delinquent and Foreclosure Rates Delinquent loans still at troubling levels. Expect foreclosures to rise. Noncurrent Loans There are 7 million noncurrent loans but that is down from 8.1 million at the beginning of the year. New Problem Loans Unfortunately, things have gotten worse since July-August, just about when home prices stopped rising. Average Days Delinquent for Homes in Foreclosure That chart highlights the desperate need to speed up, not halt the foreclosure process. Economic Conditions DeterioratingUnfortunately, but not unexpectedly, things are getting worse since mid-summer. Adding to the housing misery, over 2 million unemployed workers will lose benefits starting November 30 unless Congress acts to extend benefits in the lame-duck session. Don't count on it. Furthermore, gallup surveys point to a flat Christmas season at best, so seasonal hiring may not be as good as expected. Finally, stimulus money is spent and there is no driver for jobs with inventory replenishment nearing the end. These factors will put still more pressure on delinquent loans and foreclosures, which in turn will further pressure prices. The housing bottom may be a lot further off than most think, in terms of time and price. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Anticlimactic Blowout and Knockout Punch for Obamanamics Posted: 03 Nov 2010 02:05 AM PDT Except for a handful of races, the election is over. House ResultsRepublicans will pickup at least 59 seats in the House. They are leading in four other races. The likely total now is 62-63. Democrats lost some key ranking positions budget and other committees. I was disappointed that BJ Lawson, Doug Cloud, and John Dennis lost, but two of those three were expected and the other was a tossup. Senate ResultsIn the Senate, Republicans picked up at least 6 six seats with Alaska, Washington, and Colorado yet to come in. It appears Lisa Murkowski will win a write-in campaign to retain her seat in Alaska. If so, she will caucus with the Republicans. Buck has a slight lead in Colorado so that would make it 48 total and a pickup of 8 (counting Buck and Murkowski). Washington will likely go to Democrat Murray. The only true Senate disappointment is majority leader Harry Reid held onto his seat. GovernorsIn Gubernatorial races, Republicans picked up 10-11 seats, with Florida likely. Independents picked up Rhode Island and perhaps Maine. Republicans also picked up 17 state legislatures. The big Gubernatorial disappointment is Illinois. This race will come down to a few thousand votes. Chicago provided overwhelming totals for Quinn, and Quinn will likely win. Knockout Punch for ObamanamicsThis was the biggest pickup for either party in 62 years. As I said yesterday, the only question was the size of the blowout. The good news is this is a knockout punch for Obamanamics. Cap-and-Trade and a whole bunch of other Obama supported nonsense is no dead. This Congress, especially the House, will be far more fiscally conservative than the last, also a good thing. The bad news is the economy will remain stuck in the mud and troops will likely remain stuck in Afghanistan and 139 other places around the globe. The Republicans can block anything they want, but they cannot pass anything they want. The same holds true for Senate Democrats. No miracles are in store. So don't expect any. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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