Bernanke uses his words
The Fed chief reinforces the notion that, in the wake of the central bank's zero-percent interest rate policy, the 'verbiage standard' is all that remains.
I'm sure that everyone reading this knows that Federal Reserve Chairman Ben Bernanke's speech July 10 moved markets. The Wall Street Journal's headline -- "Fed affirms easy-money tilt" -- says it all.
When you are on the "verbiage standard," as we now are, the noise level can be quite high.
However, I think the fact that all markets responded (and all accounts I have read regarding Bernanke's comments interpreted them as the remarks of someone very reluctant to taper) means that was the message he wanted to deliver.
As I said in my July 10 column on my website (subscription required) before Ben's speech:
"If by some miracle the economy strengthens, the Fed will cut back the amount of bonds it is buying, but remember, that will not be anything that could remotely be considered tightening, and between now and then our central bankers will try to jawbone longer-term interest rates lower. So they may have a game plan to be slightly less 'accommodative,' but they are liable to talk a whole lot easier than whatever they pretend their policy is going to be. And as those last two sentences should make clear, the noise factor is liable to be exceedingly high."
The predicament the Fed is in is that it is in the process of "losing the bond market," and it is trapped. It can't even hint about reducing its buying by a measly $20 billion (which used to be a big number but is a rounding error nowadays, when it comes to monetization) because of how bonds -- and, at some point, stocks -- misbehave whenever the subject comes up.
As far as the eye can print
The takeaways of what our Fed chairman had to say were that "highly accommodative monetary policy" would be needed for the foreseeable future, and that he finally made a point that I think many of us could agree with, which is that the unemployment rate of 7.6% might "overstate the health of the labor market." Bernanke also made it clear that the Fed would not raise rates for some time, even after we hit 6.5% unemployment.
In short, Bernanke corroborated all of the points that have been espoused by those of us who have felt that we understood the DNA of the Federal Open Market Committee doves. They really don't want to stop printing unless the employment gains are very strong. Which means fretting over taper talk is silly, for two reasons:
- The economy will not be strong enough, I don't think.
- And even if it is, the kind of tapering Fed officials are talking about is really quite small.
However, I don't want to lose sight of the fact that while Bernanke (and many others) thinks the bond market is declining because the Fed appeared to talk tough, some of us believe that the bond market is actually in the early stages of taking away the printing press from the Fed. If market participants finally get it through their heads that tapering, let alone any sort of tighter money conditions, is off the table and bonds can't make a substantial rally back near the old highs, then we will probably be able to conclude that the Fed has "lost" that market. (If bond holders begin to discipline the Fed, we will be on our way to the funding crisis I have long warned of.)
It's his way or the high-yield way
This is all very subjective, and we will have to see how it plays out. But what Bernanke made clear is that if the Treasury market doesn't cooperate with him (or the stock market, for that matter) he will respond.
This is the Bernanke quote that I think really got people's attention: "And I guess the final thing I would say in terms of risks of course is that we have seen some tightening of financial conditions, and that if, as I've said and as I said in my press conference and other places, that if financial conditions were to tighten to the extent that they jeopardize the achievement of our inflation and employment objectives, then we would have to push back against that."
So there you have it. The Fed is essentially trapped. If the financial markets don't continue to go higher, or if the bond market doesn't stay where the Fed wants it, it will fight that. Therefore, down the road, if interest rates move higher and the Fed thinks they shouldn't, it will take action (i.e., "push back against that"), which will only reinforce the idea that the Fed has indeed lost control of the bond market, and the ramifications of that will be quite ugly. Said differently, the Fed will conclude that any rate rise against its wishes is unwarranted and resist that, which will make matters worse.
To be sure, taking action premised on that outcome is not today's business. For now, markets are joyous and, at this point, stocks have really set themselves up for disappointment as we go through earnings season. Of course, now that Bernanke has promised stock bulls that he has their back again, the response to negative news will be that much more informative.
The two points I think we want to take away are that the Fed can't even talk about tapering, and the question of at what interest rate will the bond market really fail.
Know what the stock market looks like??? A JUNKIE!! If it NEEDS $85,000,000,000 a MONTH to stay afloat, guess what THAT means? It's ADDICTED to counterfeit money that the FED is printing every month. The FED has two and ONLY TWO choices, now. It can continue on like it has, and we're going to go into HYPERINFLATION eventually, or it can stop this stupid stimulus [which is ONLY helping the rich, who own most of the stock now], but if it does THAT, the stock market is going to crash. The FED SHOULD stop NOW, let the market crash to where it SHOULD be, and let deflation take its course. By the way, what would be so bad about deflation? At least our cost of living would be DECREASING instead of INCREASING, but since deflation would help the poor more than the rich, the FED will NEVER agree to it. God forbid the poor be helped in THIS country
We are truly watching history unfold. The actions of this Fed Chairman will be studied for many years to come.
As for corporate taxes, if ANYONE thinks that the corporations are paying them, then they're STUPIDER than I thought, Hell people!!!!! YOU are paying the corporate taxes in the form of higher prices and lower wages. Another reason the corporations aren't increasing jobs in this country: Try and start your own business and see how many FAT-SSED do-nothing [I'm going to screw YOU over until YOU bribe me] bureaucrats come out of the woodwork. I think their numbers are more than the number of COCKROACHES in the Florida swamps, but I really don't want to insult cockroaches.
You REALLY want more jobs in this country?? Get rid of EVERY government idiot [federal, state, and local] including the IRS, and see how fast the economy recovers. Also, BURN the federal register, which is ILLEGAL and UNCONSTITUTIONAL, too. Hell we'd NEVER would have had an energy crisis if they burnt the federal register [since the paper used to print it, probably uses about 10,000 square mile of forest]
Yup, just like a politician.
As the old joke goes:
Q: How do you tell when a politician is lying?
A: His lips are moving.
When the time comes.I truly hope tar and feathering are back in vogue.
BUT IN TIME THEY WILL BE LEARNING TO AIM FOR THE HEAD!!!
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ABOUT BILL FLECKENSTEIN
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
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As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay.
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