Tuesday, December 17, 2013 Zeb’s VUE

General Information and Analysis

Unhappy Birthday, Federal Reserve

Today is the 100^th birthday of the Federal Reserve (the organization I love to hate).  Possibly it is unfair to wish them an unhappy birthday since my whole life and the economy of the USA seems to be governed by their decisions.

Shall we celebrate?  Let’s not as they have crushed the value of the dollar over the last 100 years.  You don’t have to be a mathematician to calculate that if we paid $5.00 for a birthday card today for the Federal Reserve, that we would pay $112.95 in 2113 (100 years from now).  Yes, according to the figures, prices have increased by 2,259% over the last 100 years. 

The Federal Reserve mandate has had scope creep since their inception.  The original mandate was to protect the currency, but then Congress and the Senate added GDP growth and employment growth to their mandate. 

In order to do this since the sub-prime debacle, the Federal Reserve’s balance sheet has grown.  Most of the $4.0 trillion dollars or so is due to QE (Quantitative Easing).  M2 money supply (paper money supply) has gone up 27% since 2009.  The Feds continue to increase the currency through debt accumulation of $85 billion per month ($1.2 trillion dollars per year).  

The policy of very low interest rates have hurt retirees more than anyone.  The hurt will not only be their 401K, IRA and other private retirement, but also Social Security as Social Security can only invest in US Treasuries.  Their policy has hurt the retirees in so many ways that it is despicable. 

However, it may be that the powers that be wholeheartedly believe they are on the right path.  They must believe this path is the only way to save the nation.  They must believe that financial stability is based on overwhelming debt that will drive GDP and future wealth.  From a small business person’s viewpoint, their policy is the greatest threat to financial and political stability this country has ever faced.  (OK, go ahead and argue that without the “new deal” from Franklin D Roosevelt, there would not have been a USA.  However, whether one supports the “new deal” or opposes it, we can only observe only the results; not what might have been.)

Was the Federal Reserve the savior of the country during the sub-prime meltdown and banking liquidity crises?  Instead of answering that, we might ask about how the Federal Reserve will wind down QE without crashing stock markets, bond markets, and the economy.  How long will that take?

Then even more seriously, how will the Federal Reserve liquidate trillions of $$$ of debt they are holding?  At the same time, they must manage inflation if things do not go exactly right.

With all the QE, economic progress is slow.  GDP is recovering (slowly) and employment is improving (based on spurious assumptions by the Bureau of Labor Statistics).  The inflation rate, however, has been persistently below the Fed’s objective. 

This reflects weak consumer buying and even weaker wage growth.  We have increased employment at the price of low paying jobs added, and very little middleclass wages.  Inflation is going the wrong way.  Commerce Department’s personal consumption price index fell to an annual rate of just .7% in October; less than half the 2% Fed’s target rate.

Basically, I cannot see why I would wish the Federal Reserve a Happy Birthday.   

US

Tapering:

The world is waiting on pins and needles for the great governors of the USA to pronounce “to taper or not to taper”. 

A budget deal in Congress and solid economic data seems to indicate the Federal Reserve will taper.  Yet, inflation is way below target. 

A Budget deal looks to have the votes in the Senate.  Congress has overwhelmingly approved the budget, and the Senate appears to have the vote to overcome a filibuster.  That means at least 5 Republicans will join the 55 Democrats in voting for the budget.

The attached URL is a story from MarketWatch.  http://blogs.marketwatch.com/capitolreport/2013/12/16/fed-never-grabs-punch-bowl-in-december-analyst-points-out/  According to the article, the chances of a Fed taper during this week's meeting are reduced because of the calendar.  "The Fed doesn't like to begin engineering less-easy policies at the end of the year, said Robert DiClemente, head of the U.S. economics team for Citigroup. In fact, the Fed hasn't done it in the last 40 years.
Over eight major interest-rate policy cycles dating back to the early 1970s, all have begun in either the first or second quarter, DiClemente said.

Bank Stress Tests

 

In the near future, the Fed intends to use its own estimates about the effects a recession would have on bank balance sheets.  In the past, the Fed has relied on data from the firms themselves. 

Again, what the Feds will do with this new approach is all up in speculation. The effects (whatever way the Feds go) on the banks is also speculation. 

According to Goldman Sachs, the most likely outcome is to require banks to hold more loss-absorbing capital. 

The banks have fought the Volker rule, tooth and nail: “restrict United States banks from making certain kinds of speculative investments that do not benefit their customers.” 

 

 

    There is no past history to indicate that the Federal Reserve would do anything to hurt the bonuses the banks pay out.  Therefore, Goldman and all the others are purely speculating – and those organization don’t have a history of telling the truth about what is really going on.

EuroZone

The Eurozone, UK and other overseas stock markets are flat.  They appear (at 6:19 AM PST) to be awaiting the outcome of the two-day FOMC meeting today and tomorrow.  As usual, we are all waiting on pins-and-needles for the great oracles and governors to tell us the future.  Will the Federal Reserve Taper? Or not? 

German investor confidence reaches a seven-year high.  ZEW survey of investor confidence has climbed to the highest point since 2006.  Despite rather disappointing economic data from the EuroZone, investors and finance experts expect economic development in Germany to improve in 2014.  They also expect that improvement to trickle down to other EU countries.