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9/14/2012 4:23 PM
Bond Vigilantes Are Punks
By Charles Payne, CEO & Principal Analyst
Question of the Day
What will have the bigger impact on the US economy?
Watching Ben Bernanke on 60 Minutes and other interviews including his question & answer session on key Fed decision days, I got the impression his top goal was one I'd seen a lot growing up in New York - I ain't no punk!
A. Ben Bernanke's actions?
B. Apple's new smart phone?
Really eager to hear from you on this, and of course you can embellish.
Post your answer below.
Of course, on the streets of New York or in the corridors of the Federal Reserve it takes more than tough talk and swagger, occasionally you have to show and prove.
Yesterday, Ben Bernanke came ready to prove and he did, with an economic version of the vigilante. The Fed is opening the spigots and saying they'll turn them off when they are good and ready. The result was a giant spike in stocks, gold, and silver while the dollar took it on the chin.
This Charles Bronson act is playing well with people that manage money because it's clear the Fed is ready to take on the laws of economics, history and, some would say, common sense to achieve its goals. One could argue the money isn't going directly into those assets, so this is misplaced enthusiasm. But it is a lot of money gushing around the system, and at some point it will seep out into Main Street. The thing is, many wonder if this action is a sign of desperation or the ultimate death wish.
Does the Fed Matter?
Since late 2008 the Federal Reserve has embarked on a series of actions, from traditional rate cuts to what's known as Quantitative Easing, which involves the purchase of assets from commercial banks and institutions like Fannie Mae and Freddie Mac. Now the Fed will begin buying $40.0 billion in mortgage backed securities each month until further notice, and will reinvest $45.0 billion in interest payments. In addition, low rates are being pushed to mid 2015 from late 2014. The question is, has the Fed lost its magic to affect the jobs market and is it pushing so hard that once the inflation dam breaks, we all drown?
* Began November 25, 2008, with an initial purchase of $500 billion in mortgage backed securities but added on purchases from Fannie Mae, Freddie Mac, and Federal Home Loan banks.
* In March 2009, the Fed upped its buying to an extra $750 billion in mortgage backed securities.
* The program ended March 31, 2010, with the Fed having purchased $1.25 trillion of mortgage backed securities and $175 billion in agency backed securities.
* This program began November 3, 2010, with the Fed buying bonds to the tune of $600.0 billion with measured purchases.
* This program ended June 30, 2011.
What are the banks doing with the money?
Many banks argue there is no demand for loans or that standards have become very rigid since the Great Recession began. But, the Fed's survey of senior loan officers seems to belie this notion. There has been a reversal of demand for loans for primary residence since the month before QE1 began to the most recent survey. Current demand for mortgages on primary residence is up significantly, an exact reversal from October 2008. Yet, banks admit willingness is increasing at a far slower pace (see tables).
Bank stocks aren't faring well since QE programs began (the secret $13.0 trillion in loans and TARP).
The pay is great again, with the top four executives at Citigroup (not including Pandit) earning $42.0 million in 2010 and Pandit's pay, which was rejected by shareholders, rebounded to $15.0 million last year. But the shares of this and other large commercials banks haven't done much since rebounding from March 2009 lows, due in part to a seldom talked about accounting change that immediately created profits and healthy balance sheets.
* C was $82.90 (split adjusted) now $34.10
* BAC was $16.25 now $9.31
There is the notion of a wealth effect that could kick into gear, although it's unlikely unless the Dow reaches 15,000, and there is job growth, and quite frankly if there is a new president. Maybe then that elusive virtuous cycle begins where things are better, so people spend and companies hire, which makes things better so people spend and companies hire. Home values are coming off lows and rates are dirt cheap so this action will have limited impact on housing that would have otherwise been there.
For now, I think the risks outweigh the rewards of Fed actions, but I'll take stock market gains and remind everyone to be careful and don't drink the Kool-Aid, even if it looks so sweet coming from the Fed's golden cup.
I don't think Ben Bernanke made such a massive gamble simply only to keep President Obama in office. In fact, QE3 is an indictment against the administration as it screams to the world that fiscal policies are not working and that the nation is in so much more trouble than anyone knows. Remember that this is the same Bernanke who dragged his feet at the beginning of the fiscal crisis. He was cautious to a huge fault. I don't hear much bragging about it anymore by politicians, but "jump starting" the economy is what the Fed is trying to do. Not only have they filled the gas tank with high octane rocket fuel Ben poured it all over the ride as well. He's going to set this baby on fire!
This week Moody's talked about lowering the nation's debt rating, and yesterday the Fed went bananas ... none of this would happen if the economy were firing on all cylinders.
For the market the bias remains to the upside, with pitfalls future news that underscores why the Fed took this action, and yet even that could be mitigated with low expectations. Speaking of which, this morning's CPI numbers give the Fed cover as they point to a benign inflationary environment from the government's point of view while core retail sales actually missed. In fact, not only are core retail sales of 0.1%, well below consensus of 0.4%, but prior month results for headline and core were revised lower (this is the most amazing coincidence; just about all the economic data we get each month is later revised lower).
|Charles, you left out C., Romney wins the election. The answer is C.|
Bpb on 9/14/2012 10:18:14 AM
|apple, they know what they are doing, can't say that about goverment or fed|
virginia hoffman on 9/14/2012 10:23:03 AM
|B, Apple, It's real tangible commerce, not overcooked financial meddling!|
Bill on 9/14/2012 10:34:57 AM
|Obviously Bernake, that is a lot of money he is going to print. Believe me, we will pay for it latter. This is just another pushing a problem past Nov. 6.|
Off the record, you have no idea of how much I look forward to your commentary each day. It is brilliant. Thank you.
tom wayne on 9/14/2012 10:44:58 AM
don on 9/14/2012 10:58:41 AM
|The i-phone is another plaything to distract the masses. Ben is printing money. He might just as well be manufacturing rope and tying it in hangman's knots.|
z on 9/14/2012 11:02:50 AM
|The answer is A - Bernanke. There will be an impact on the economy and it will not be good. Short term bump in the market followed by high inflation. If we get another 4 years without competent leadership, the future of this country looks very bleak indeed.|
Bill on 9/14/2012 11:16:06 AM
|Neither. The fact that Q1 and Q2 had so little impact on the economy considering the amount of money involved confirms that the problems are much deeper. All Bernanke has done is create a divergence between the stock market and the rest of the economy that should itself be worrisome. He has been pushing on a string. Of far more significance is the emergence of Gen X & Y as a huge new voting block of 126 million strong who have gotten the short end of the stick -- both in terms of their future and the underlying demographic impact of 55.2 million abortions -- all from their generation. Now they have their own leaders emerging in people like Paul Ryan and Marco Rubio. When they wake up, the effect will be like a tsunami. Boomers like Obama, Hillary and Romney will have to move on. The new wave is coming. The only question is when it will hit. I think sooner than anyone imagines.|
Dennis Howard on 9/14/2012 12:14:57 PM
|I vote for Apple if we are talking positive impact - more jobs.|
I vote for Big Ben if we are talking negative impact - more inflation.
Overall, a toss-up. The inflation impact will be small and the iphone buyers would spend their money elsewhere if not on the latest iphone.
Bob G. on 9/14/2012 1:18:37 PM
|Ben's action signals the end.|
They say that inflation is a hidden tax which means we will all pay more for goods and services. The poor will pay proportionally more--$5.00 a gallon gas may piss off a wealthy person but it cripples a working stiff.
At least I won't have to get a wheel barrel (for transporting my dollar bills) since almost all my financial transactions are done electronically.
Richard on 9/14/2012 1:33:52 PM
|Ever since the Federal Government redefined the CPI formula years ago and took out anything that really matters like food, housing, medical expenses, etc. they have been lying about the real rate of inflation. In my case alone my medical insurance (self paid) has gone up a minimum of 35% a year for the past five years. My husband and I are semi-retired and are trying to live on our investments. Because of the stupid low rates forced on us by Bernanke and this and the past administrations we are still in the stock market casino roller coaster. We have found some ways to beat the real inflation rate, but always with a huge risk for a better rate! We still remember with fondness the rates we were getting on our money during the Carter administration, about 18%. Those were the good old days!!|
Clare on 9/14/2012 1:34:29 PM
|If anything behaves normally in this unsettled time, the actual product should boost the economy more than the future wallpaper.|
Patricia Flynn on 9/14/2012 3:33:49 PM
|Is there such thing as an Apple bubble? Seems like it, since a significant portion of Applelites seem to need to have the newest version of all things Apple, even if the improvements aren't especially significant in day to day use. So the new iPhone 5 will probably take APPL up another 20%, putting it even further out front as the world's highest-valued company. But Uncle Ben's actions will have the greater impact. Gas prices will climb like a monkey on a burning pole, which will be another uppercut to the working poor. The gap between haves and have-a-littles will grow larger, with massive civil unrest as one conceiveable outcome. Food and tech will be come more expensive as diesel, fertilizers, precious metals and rare earths all jump in price, putting more of a squeeze on everyone not making significant $$, which is the vast majority of Americans. Housing prices may start to recover as people take advantage of low interest rates, but when interest rates finally move up, as they'll have to, housing values will drop again, probably right about the time they're really starting to recover. In short - Apple products good in short term and long term but only for people who can afford them or the stock; Bernake QE3 good in short term, very bad long term for everyone except the wealthy (not including the Siegals, the folks building the 900k sf house in Florida. To see how far down the rabbit hole the combo of money and hubris can take you, watch the documentary, "The Queen of Versailles"). http://www.magpictures.com/thequeenofversailles/|
Art Fox on 9/14/2012 5:28:58 PM
|It would appear people are too busy consuming to comment here. Conspicuous consumption or idiotic expenditures. Perhaps a little of both. I'd rather spend the money to keep my loved ones and me healthy. We've been taking Anatabloc for 1yr now. You should too big fella. I really appreciate your market insights and commentaries and want you around for many decades to come. Consider having your staff investigate 'the fire inside' and how the plant based small molecule alkaloid anatabine citrate puts it out better and safer than anything on the market today.|
Just don't tell Ben, he's done enough damage.
texrunner on 9/15/2012 11:23:46 AM
|Apple will do more good for the economy than The Bernank's moves. I am not convinced at all the QE3 will do any good. I fear inflation in a few years that will require the Fed to react quickly (which it won't) to stem the inflation from rising and rising and rising. The only way to get the economy moving is having adult conversations amongst the politicians in D.C. I'm not holding my breath for that one either.|
Stephanie on 9/16/2012 9:25:49 AM
|It was great meeting you yesterday in Vegas|
Steve junker on 9/16/2012 6:50:44 PM
|Apple's new smartphone will have positive impact on the economy. QE3 will dig a big hole for the US economy. Dollar falls. Another hand out to business with no accountability. Wrong move. Congress needs to wake up and lead. Fed can't do much anymore.|
RD McKinney on 9/18/2012 7:57:15 AM
|Both - Bernanke's move will be bad and Apple's will be good. This country is in a tailspin and the only way out is to first reduce power (big government)to minimum then apply full opposite rudder (Republicans) which will hold to counteract the spin rotation. Next, the elevator control is moved briskly forward (American business) to reduce the angle of attack below the critical angle. Correction made and we are again safely on our way. God bless you and the USA.|
Constance Helgason on 9/20/2012 12:05:57 PM
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