FedSpeak Proves Correlation *AGAIN*
Courtesy of Karl Denninger at The Market Ticker
Here’s Bernanke’s speech and what he said:
We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.
That’s a new one. You are attentive to it eh?
Well then about this, Sir Jackass?
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An EXACT correlation as soon as Bernanke’s words were released – synchronized EXACTLY as to time. Dollar spiked, the S&P 500 dropped.
The Fed has the lever to force this carry trade out of the system before it grows large enough to destroy our economy and productivity. They need only raise rates – not a lot – just enough to make our markets unattractive. 2% should do it nicely.
Who can argue that 2% isn’t "very accommodative" in terms of rates?
Bernanke claims:
My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely.
He’s lying. If he truly believed this The Fed Funds rate would not be at zero – but it is.
Bernanke "outs" himself by saying:
The demand for credit also has fallen significantly: For example, households are spending less than they did last year on big-ticket durable goods typically purchased with credit, and businesses are reducing investment outlays and thus have less need to borrow. Because of weakened balance sheets, fewer potential borrowers are creditworthy, even if they are willing to take on more debt.
Here’s the most-recent Z1 credit graph:
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Note that The Fed’s "base money" is at present about $1.8 trillion, which is $1 trillion larger than the "normal" $800 billion.
But credit outstanding is some $53 trillion dollars.
Clearly, without credit expansion it is not possible for economic growth to occur. But credit expansion requires economic activity that in turn allows the coupon payments – interest and principal – to be made.
Where is the evidence that this is, at present, possible?
It’s absent because it hasn’t happened, and that’s a major problem. By refusing to allow the market to take care of the imprudent, forcing the default of bad loans and thus clearing them from both the lender and borrower’s balance sheets, we have impaired any ability to return to economic growth, as the bad debt and its servicing requirements still exist.
Ben goes on to say:
With nearly $500 billion of CRE loans scheduled to mature annually over the next few years, the performance of this sector depends critically on the ability of borrowers to refinance many of those loans. Especially if CMBS financing remains unavailable, banks will face the tough decision of whether to roll over maturing debt or to foreclose.
These "loans" were made imprudently with dramatically-overstated expectations for rents and occupancy. There is no solution to this problem that results in sustainable growth without foreclosure and the loss being taken, just as there is not in residential real estate and home mortgages. Yet the policy of The Fed and government is to "extend and pretend", or worse, take all the trash onto the balance sheet of either The Fed or The Treasury, effectively hiding the losses – for a while. But again, that debt still requires servicing no matter where it is, and that (once again) precludes safe and sound lending, as the debt-carrying capacity has been consumed.
Besides cutting jobs, many employers have reduced hours for the workers they have retained. For example, the number of part-time workers who report that they want a full-time job but cannot find one has more than doubled since the recession began, a much larger increase than in previous deep recessions. In addition, the average workweek for production and nonsupervisory workers has fallen to 33 hours, the lowest level in the postwar period. These data suggest that the excess supply of labor is even greater than indicated by the unemployment rate alone.
No, really? You mean that having a McJob isn’t as good as screwing together cars? And further, that having your boss scream at you "work harder and faster or GET FIRED!" isn’t good for consumer income – and morale?
Weak income growth, should it persist, will restrain household spending.
There is no income growth. Intentional understatements of inflation – hedonic adjustments and the refusal to include actual house price increases, even though the majority of Americans own homes, mean that we have spent the last ten years watching the average American’s real household purchasing power be destroyed. Now we add outright job loss and ramping credit card rates to the mix, as if the deception by the government and The Fed was insufficient – kicking people after you’ve managed to shove ’em in the gutter has become the next great Bankster Sport.
The unemployment rate among people between the ages of 16 and 24 has risen to 19 percent–and among African American youths, it is now about 30 percent.
That’s because currency and interest-rate imbalances have resulted in those front-line jobs, including especially manufacturing, all going over to China – where they will work for $2/day. This will not go away without addressing the structural imbalances that The Fed, Congress and The Administration have intentionally created.
Final demand shows signs of strengthening, supported by the broad improvement in financial conditions.
How? Without jobs how does final demand – with 70% of the economy being consumer spending – strengthen? Yes, the government can (and has thus far) blow money it doesn’t have, so long as China continues to allow it, and transfer that to people. Is that sustainable?
The outlook for inflation is also subject to a number of crosscurrents. Many factors affect inflation, including slack in resource utilization, inflation expectations, exchange rates, and the prices of oil and other commodities.
The Fed has directly caused the price of oil to more than double since this spring with its zero interest rates and the establishment of the dollar carry trade. There is no evidence whatsoever that Bernanke gives a tinker’s damn if your gasoline is north of $3/gallon, so I hope you’re prepared for it to go to $5, $6, $7 or even $8 – because if this game continues, it will.
We have a wide range of tools for removing monetary policy accommodation when the economic outlook requires us to do so, and we will calibrate the timing and pace of any future tightening to best foster maximum employment and price stability.
Along with 30% unemployment, 29.9% credit card interest rates and destroyed futures for your children and grandchildren.
Bernanke, Geithner and the Administration all are trying to do the impossible – return to "economic growth" in a credit-based monetary system where the carrying capacity of debt has been effectively reached, WITHOUT forcing the removal of that bad debt by allowing the default of those poorly-underwritten and issued loans.
The immovable object has met the irresistible force.
PS: Oh, Bernanke just said he sees no problems with valuations in the US Stock market. Really Ben? A P/E of nearly 140 is just fine, right? No valuation bubble there!
