8/31/12

All red is mine.

HBBC (Honey Boo-Boo Child a/k/a the Honorable Ben Bernanke, Chairman; take your pick) delivered comments today at Jackson Hole. http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm Heres the juicy part that we were all waiting for: As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years. Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability HBBC from Jackson Hole, August, 2010: http://www.federalreserve.gov/newsevents/speech/bernanke20100827a.htm We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly. The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool. Policy Options for Further Easing Notwithstanding the fact that the policy rate is near its zero lower bound, the Federal Reserve retains a number of tools and strategies for providing additional stimulus. I will focus here on three that have been part of recent staff analyses and discussion at FOMC meetings: (1) conducting additional purchases of longer-term securities, (2) modifying the Committee's communication, and (3) reducing the interest paid on excess reserves. I will also comment on a fourth strategy, proposed by several economists--namely, that the FOMC increase its inflation goals. As you know, HBBC busted a QE move at the subsequent, November, 2010 FOMC meeting.

English is my native tongue. Yours? Huh? You spoke Polish until kindergarten when they enrolled you in the Alliance Franaise until you were sent to bilingual Korean classes every weekend up to the age of 16 when you got an after-school job in a bodega? No problem, Sunshine. You, too, can understand that the message of 2010 is the same as the message of 2012. Case closed. He must have had one heck of a scare from the August NFP report which is due a week from today. Yee-ha. The difference, IMHO, is in the focus of his commentary. In 2010, it was a broader-based view of economic malaise that inspired his wording. Today, there is a major league, almost exclusive focus on the problem of the Unemployment situation. Here are a couple o things which he said; had I been in attendance, I probably would be under arrest by now. This is basically how he describes the genius of buying US treasuries: Its a portfolio balance channel, dont you know? The FED buys the govvies, taking them from, say, investor hands. Govvie prices go up; yields down. The investor then takes that money and goes and buys something else, say, MBS, taking them from other investor hands. MBS prices go up, yields go down. And so on and so forth, thru the asset-class food chain, noting that at each and every turn, the grease that makes the economic wheels turn, is being spread around. Eventually, the chain gets to stocks. This is where I had to restrain myself. (Italics are my input.) Importantly, the effects of *LSAPs do not appear to be confined to longer-term Treasury yields. Notably, LSAPs have been found to be associated with significant declines in the yields on both corporate bonds and MBS.14 The first purchase program, in particular, has been linked to substantial reductions in MBS yields and retail mortgage rates. (See? Thats the channel thing where the positive effects of the stimulus are passed along.) LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC's decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions. *Large Size Asset Purchases Go on. Ill wait for you to read that again. This essobee has abused not only the micro guys but the macros as well. As he has jackassed the asset classes around until the only focus is Risk On or Risk Off on any given trading day. I could spit.

And then has the sand to make a public comment that stocks go up when he prints money because discount rates have gone down and the economic outlook has improved on account of it? This is what makes the hot dogs run stocks up the flagpole when The Bernank saddles up? Better economic outlook? Amazing. Lemme go back now and give you the reality version of the Bernanke portfolio balance channel. He relieves investors of the lowest risk-bearing vehicles, forcing them to seek yield elsewhere and at the same time, take on increasing risk. Until, increasingly yield-starved as this balancing is relentless, they arrive at the door of the stock market. And mindlessly take the plunge. Because they have no choice. They are now balls-to-the-walls exposed. Waiting for the next round of QE. Because Lord knows, the first two did jack. Of course, in the earliest part of his diatribe today, he does make a case as to how the lower rates worked some magic on the economy, although exactly how much is difficult to pinpoint. As usual, too, he also blames the fiscal intransigence as well as tight credit conditions at the banks for holding back the beauty of his genius from working its total magic. And yes, todays pop in Crude is demand-driven. KMA. Employment: 8.3%. One more time: At this stage of the game, ZIRP is destructive. I dont know how many more times I can say it. Have a nice 3-day weekend!

Joan McCullough, East Shore Partners, 1-212-226-1223 Trading: 1-800-222-8723 joanmccullough@eastshorepartners.com

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