Central bankers running out of road

If Federal Reserve forecasts point toward full employment and price stability, policymakers at the upcoming FOMC meeting will have a hard time getting Wall Street to reconcile that outlook with a 1% Fed funds rate.

By Bill_Fleckenstein Sep 13, 2013 3:37PM

Federal Reserve Building © Hisham Ibrahim/CorbisThe much-anticipated nonfarm payroll report took center stage upon its Sept. 6 release, with the data considerably weaker than expected. The actual headline number was down only slightly, at 169,000 jobs, versus expectations of 180,000 (the Federal-Reserve-is-going-to-taper-because-the-economy-is-so-great crowd had been mentally penciling in 200,000, maintaining an optimism they have demonstrated for many months). But the revisions were pretty startling: July was revised down by about 60,000 jobs and June was also reduced.


Nonetheless, it would appear that stock bulls still want to believe that the Fed is going to taper, and that action means everything is going to be better because the Fed thinks so. (How anyone can believe that after what we have witnessed the Fed do in the past 20 years is unfathomable to me, but there it is.)


Reverse engineering, reverse psychology


Just as a lot of folks marked time waiting for the recent jobs numbers, I expect there will be a certain amount of procrastination among investors ahead of the Federal Open Market Committee meetings on Sept. 17-18. Obviously, the high likelihood is that not much is going to occur at that meeting. Either the Fed won't taper, which obviously means no change in policy, or it will taper a tiny amount (say, $10 billion or so a month).


In the big scheme of things, the difference between those two scenarios is essentially a rounding error. But market expectations also factor into how markets move, and even if the Fed ends up doing nothing, that will have ramifications (i.e., liquidity-driven markets need even more liquidity over time), as regular readers are no doubt aware.


The fact of the matter is, after four years and more than $3 trillion of quantitative easing, the economy is still limping along and job creation is pathetic, yet the Fed believes its policies have worked and many stock bulls see the financial environment as nearly perfect for speculation (though I doubt that the average citizen in America feels very good at all about financial conditions, as the Fed has most definitely exacerbated the spread between the poor/middle class and those above them).


At the end of the day, the Fed is basically trapped. It can’t reduce the amount of liquidity it is injecting into the system by very much without having financial markets and economy roll over hard (though that doesn't keep Bernanke & Co. from deluding themselves into thinking that they can remove the accommodation).


Because they continue to believe in their own abilities (incorrectly), if they go very far down that road, they will have to reverse gears and print more money all over again, and they will keep doing that until the bond market stops them -- a point I have been making for more than four years now.


You can't get there from here


When I discuss the Fed and how it is trapped I tend to do it more or less from the 10,000-foot level, because it is so obvious to me. However, my friend the Lord of the Dark Matter shared a bit of research this week from JPMorgan’s chief U.S. economist, Michael Feroli, who described the Fed's predicament from more of a micro standpoint.


The reason I bring this up is because the whole world obviously does not agree with my opinion of what the Fed has done. In fact, quite the contrary, as a lot of people seem to think the Fed knows what it is doing. But as more people discover what Feroli is pointing out, they will realize the Fed is trapped, and as that becomes clearer, it will have implications for financial assets and gold. To quote Feroli: 

"The Fed faces an interesting situation at the September FOMC meeting. At that meeting they will introduce their 2016 interest rate forecasts for the first time. The problem is that at the end of 2016 their economic forecasts may well show an economy that is close to full employment and price stability. Normally in that situation one would expect the Fed funds rate to be close to neutral -- which is somewhere close to 4%. However, their end-of-2015 forecasts have a funds rate forecast centered around 1%. An end-of-2016 funds rate of 4%, which implies 300bp of tightening over the course of 2016, is well in excess of what the market is pricing in. If the FOMC were to produce such a forecast, and if the market were to take its cue from that forecast, then the ensuing tightening in financial conditions would undo much of the hard work the Fed has done in getting rates low enough to support the recovery.
"In some ways the Fed is at risk of being a victim of its own success. After a few fits and starts, the Fed has finally convinced the market it will keep rates low for a very long time. However, the Fed's ever-expanding embrace of transparency means it now has to quantify how its verbal attachment to accommodative policy translates into economic and policy rate forecasts. For someone like Michael Woodford, whose paper at last year's Jackson Hole conference arguably had a meaningful impact on the policy debate, such forecasts shouldn't have much of an influence on financial conditions: after all, it is well known that the Fed doesn't have much of an advantage over the private sector in forecasting accuracy."

 Amen to that!


Blue chips off the old block 

Lastly, I wanted to comment on the decision by the induction committee at the Dow Jones Hall of Fame to add Goldman Sachs Group (GS), Visa (V) and Nike (NKE) to the Dow Jones Industrial Average ($INDU), while kicking out Hewlett-Packard (HPQ), Bank of America (BAC), and Alcoa (AA). (Alcoa was a longtime member of the Dow -- since 1959 -- and one of the 10 oldest; HP and Bank of America were added within the last 15 years or so.)


When folks tell you how stocks always work out in the long run, they fail to point out, as far as the indexes go, that there is a reshuffling that affects the long-term performance. Having said that, quite often stocks peak not long after they are added to the Dow -- witness Intel (INTC), Cisco Systems (CSCO) and Microsoft (MSFT), which I suppose are at risk now because they have underperformed. (Microsoft owns MSN Money.)


In the past 20 years or so, those who make the decisions appear to be looking for former winners and extrapolating forward. In any case, given that the Dow is ridiculous price-weighted, adding high-priced names and kicking out lower-priced ones is a lame attempt to boost the index, but iy will mostly just add to volatility.


King World News


In my latest interview with Eric King, we go into a fair amount of detail regarding how the various will-they-or-won't-they tapering scenarios could play out, the role of crowd psychology and how we are in a unique moment in financial history. Interested readers can listen to it here.


Note to readers 

There will no column next week, as I will be traveling, but we will have some important news in the next few weeks, so stay tuned. In the meantime, be sure to follow us on Twitter @FlecksMarketRap.

At the time of publication, Bill Fleckenstein owned gold.

Sep 13, 2013 6:19PM
 "You can't get there from here" is a perfect description of where we in fact "are".

"There" is a place where debts/obligations/entitlements are sustainable and possible to honor. "There" is a place that is physically and mathematically sound, rational and without illusions.

"Here" - is a place where (nothing but) debt IS the definition of "money". Think about that.
"Here" is a place where the only way to continue the farce is to monetize debt (which is "money") into even more money (which is debt). All so that we get our "money" for nothing (and "our chicks for free" - which I am all for). But it's also insane.
"Here" is a place you get to immorally and irresponsibly pass YOUR obligations and debts to your children and grand-children -  and even their unborn children.
"Here" is a place where our country is bankrupt - financially, morally and mentally. 

Sep 13, 2013 11:14PM

isnt it amazing how jobs reports always seem to be revised down.americas manufacturing was the corner stone of its power.when we allowed free trade we essentially opened the flood gates to our jobs.manufacturing left.remember perot and his quote about a giant sucking sound as jobs left this country.here are easily verified side effects to free trade

1.the wealthy now get the largest percentage of all income ever

2.the new jobs created are poor paying ones in the service sector

3.the percentage of people working full time is the lowest in decades and declining

4.with the additional cash the wealthy have bribed so many of our elected officials we are no longer represented.{they have such contempt for us they dont even pretend to care what we think anymore}

the fed cant continue to print money indefinitely or itll have no value and it cant stop or the economy will collapse. Our economy is a patient.free trade has stabbed us hundreds of times. Money/blood is flowing from us to those that have our jobs.the only thing keeping our economy alive is the blood transfusions the fed is giving us.when he stops the patient is going to die

Sep 13, 2013 8:13PM

Celebrating market performance based on the fed is like celebrating the homerun record of Bonds, or the bicycling championships of Armstrong. Also, ever hear 'em say (it's their hook) you better get in the market because the dow number has gone up 10% annually on average over the past 75 years, etc? As Bill points out (the truth), this is only possible for them to claim because the dow owners constantly stack the deck with better cards to prop up their own number. Add in all the companies that went broke or performed poorly, then what's the dow annual gain? They'll never bring that up. Now combine that with the the fed's intravenous heroin injections, and the whole manipulated system makes me sick.  

Sep 13, 2013 9:33PM

Calling Gramm Leach Bliley what it is-- crooked legislation, and abolishing it, restores Glass Steagall immediately. Read this-- it's actually happened:

The following was a discussion point in the lengthy and now irrelevant review of the Dodd Discussion Draft of proposed legislation during the run-up to the Dodd-Frank Act. It is not included in the abridged version of the Tsunami Thread here at Duffminster, but is being reproduced since it demonstrates exactly what Summers supported and on what grounds he should be disqualified as a candidate for the Fed Chair. They knew what they were manipulating and they knew the consequences!

. . . Reference has been made to the Gramm-Leach-Bliley Act but I'm not aware that anyone ever posted the pertinent section that unleashed the derivatives to allow the bankers/brokers/insu​rance people to corrupt the global financial system. It's very short. It's amazing how little space you need to ruin the world.


(2) The Commission is prohibited from registering, or requiring, recommending, or suggesting, the registration under this chapter of any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act). If the Commission becomes aware that a registrant has filed a registration application with respect to such a swap agreement, the Commission shall promptly so notify the registrant. Any such registration with respect to such a swap agreement shall be void and of no force or effect.

(3) Except as provided in section 78p(a) of this title with respect to reporting requirements, the Commission is prohibited from -

(A) promulgating, interpreting, or enforcing rules; or

(B) issuing orders of general applicability; under this chapter in a manner that imposes or specifies reporting or recordkeeping requirements, procedures, or standards as prophylactic measures against fraud, manipulation, or insider trading with respect to any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act).

It speaks for itself.

Sep 13, 2013 11:53PM

 Dear Mr. Fleckenstein;


I like this article better then the last couple you've written. And I believe, if I my quote you, ' You can't get there from here ".


This is not the world of the 20's when the bottom fell out this is a totally different world with world players " The Feds have dug a hole so deed AND the major players have come and gone". But NO ONE TOLD ANYONE ELSE THE GAME IS OVER


I don't believe a market that has climbed 3000 points in a 52 wk period can maintain this level of growth with everything being as it is..My only explanation is the input China and India has been for a growth of such magnitude.


The Housing Market must be addressed as well, we can't expect growth when there's still a 1 to 360 ratio for foreclosable homes on the market and one can only guess what that ratio would really

be if the banks would open up there portfolios and place all of the homes they are holding into the housing market at one time.




THE Feds failed to "CREATE JOBS"  working man jobs, road and bridge builders, police and fireman, teachers and garbage collectors, welders and pipe fitters, painters and framers, these types of jobs are what is needed to make America Grow .


Instead they gave money away with no strings attached to the Central Banks who spent it on CEO's and buying out the competition. We Now live in a world of the Rich and the Poor created by the FED"S  and a Government with Good Intension who misunderstood GREED and the world of today.

Sep 14, 2013 12:06AM
I have been home this week recovering from surgery. That has given me a chance to watch some of these cable business/market watch channels. On the anniversary of Lehman Bros. collapse, I can't believe how upbeat these commentators are about the markets when many of the same factors are in place that preceded the collapse. Our national debt has doubled since then. Full time jobs are being replaced with part time jobs, many have left the work force, government assistance is at an all time high. I am sure folks smarter than me can name more issues. How long can you prop up our markets?
Sep 13, 2013 9:34PM
We already know what's about to happen. Standing there watching it unfold is the stupid move. Setting the stage for the morning after is the key. Destroy the viper-grip banks have on us. The Gramm Leach Bliley Act has to go NOW. It restores Glass Steagall by it's absence. COME ON AMERICA, WE CAN DO THIS.
Sep 13, 2013 9:28PM

Now we KNOW the $hit is starting to hit the fan.


When they [the government] starts revising their figures for past months [which, please note,MEANS that they're admitting that they've been LYING], you KNOW that something BAD is in store for us. They can't keep the truth hidden much longer and THEY KNOW IT.


When MOST people start believing their own propaganda about the market, WATCH OUT!!!!


Here's a bit of advice for those of you who want to take it:  GET OUT OF THE STOCK MARKET NOW!!! TAKE YOUR GD MONEY AND RUN!!! If you can afford to lose your money, by all means, do what helicopter benny says, but if you CAN'T  afford to lose your money, GET IT OUT OF THE MARKET NOW. When the GOVERNMENT FINALLY starts ADMITTING [FINALLY] that the economy is bad, when we can see all around us that it has been bad for the last 5 years. THAT'S THE  TIME TO CASH OUT AND RUN AWAY FROM WALL STREET.

Sep 13, 2013 10:54PM

If you want to know how badly the system is rigged consider this:


There is more Debt in the world than there is Wealth.


I base this off the abandonment of the Gold Standard and the fiat currency system that nearly every country in the world backs it's own currencies by.


When your currency is backed by tangible goods (rare metal has been history's preference) Growth is extremely limited. But while it's limited there is very little danger of falling into a bottomless pit. And, best of all, when people need to borrow wealth (which is what money is supposed to be; a representation of wealth - tangible goods and products) they know exactly what they're getting by turning to you. As long as there's something hard, concrete to sustain your currency the economy holds very few pitfalls for the average consumer. Why? Because the money IS there; you live in a set environment with relatively concrete standards. That hole that you could fall into - usually from spending too much or taking a bad gamble - is a certain depth; once you hit the bottom then you can focus on climbing back up. If you take a fall you're going to suffer, true. But the rest of the world isn't going to race by you; prices won't build up the sides of that hole you're in making climbing back to even a daily challenge.


But when the value of the dollar is not backed by anything (ie now) bottomless pits are possible. Rampant growth means rampant amounts of dirt will pile around you when you fall. Prices will rise out-of-control and yet you will be waiting to hit the bottom. And the bottom is further away from the top by the time you touch down. Just to climb back to your previous height is now twice a challenge. What do you do? I can tell you what you shouldn't do. You shouldn't borrow more. But what can you do to survive? Prices are still rising, even for the basics.


And that my friends is the problem of the fiat currency. With things so far out of control you can't even survive this game with the basics. The fiat system works until it doesn't. And then it will never work again. Right now we're in free fall. When the world finally stops lying to itself (and politikians stop blaming each other) we're going to realize how truly screwed we all are. And, at that point, the System will have to change. Our Fiat currency sham will have to end.

Sep 13, 2013 9:51PM
As we say here in Reno,The House always wins!! Serferdude
Sep 14, 2013 7:14PM
This planet trusts the U. S. to be the worlds reserve currency and the big perk of this honor is that the U. S. treasury can print a little extra dollars and dilute the value of the greenback once in a while when when our country gets into a bind and the world will look the other way. But D. C. found that if they leave the presses running they can deliver everything they promised in exchange for "your vote"  to keep them in office Unless our GOV. stops this practice prepare yourself for when the world dumps our dollar and looks for a new currency
Sep 14, 2013 7:18PM

right on the money Bill!!


The dancing lies of the Fed know no bounds...Washington a colossal failure in every since from White House to Capital Hill.


and the free money for the casino in New York still appalls but we'll see what happens...

Sep 14, 2013 8:33PM

SRTrtdriver , I AM NOT  a demagogue [democrat] either. Please read what I wrote carefully, I DID agree with you on Obama, all I said was the republicrats  were doing or trying to do, was screwing 95% of the country AND THE COUNTRY KNEW IT. THAT [and the idiot team they ran] is why they lost the presidential election pure and simple.


Now, about the election in 2016, IF [and that's a BIG if] the repubs can find  somebody that's NOT A RELIGOUS RIGHT-WING WHACK-JOB [because THAT scares the hell out of the electorate] they will have a good chance of electing a president. If the dems run Hilary, I'm damn sure that they will lose. Pure and simple, she's too hated by too many people on BOTH sides, and she's too old, or will be by 2016.


And you're right about Nancy Pelosi, she should be put on trial, found guilty, and SHOT for TREASON.




I said what I said, because that's the way it was in the 2012 election. I WAS NOT AGREEING OR DISAGREEING One way or the other.

Sep 14, 2013 5:53PM
How can you possibly reason with policymakers who stubbornly cling to a preference to borrow 'interest-bearing' fiat money as opposed to printing their own 'non-interest bearing' sound money?

No rational can justify that action.
Sep 14, 2013 2:56PM

You have to remember something SRT,


the way that "dubya" [idiot that he was] and his friends handled things the previous 8 years, ANYBODY who ran on the Demagogue ticket was going to win, no matter what. And what made it worse for the Repub side was McCain AND Palin together. McCain [who was STILL fighting the Vietnam War in his head, and who COULDN'T control his temper, as proved time after time on TV], and Palin, who reminded MOST Americans of the dumb, idiotic cheerleader in high  school, who could barely walk and chew gum at the same time, and the worst thing is, she came across as a STUPID CHEERLEADER. She talked like one, acted like one, and DIDN'T HAVE A GD CLUE on what it's like for a middle-class or working-class mother.


Yes, I agree with you on the current "leader", but what did you expect after 8 YEARS of STUPIDITY AND ARROGANCE from the republicrats?


The repubs were GOING TO LOSE NO matter WHO they ran for president. Especially after what dubya and his idiot friends pulled and tried to pull.

Sep 14, 2013 11:36AM

   So what your saying is, even though the stock market is going up due to 84 billion being jacked into the banks by the fed each month, the truth of the matter is it is not helping the economic job figures. Given this fact why do you believe the fed should continue doing the same thing and hoping for different results. Is that not the definition of insanity. I read a recent article from a company begging the feds to give them a loan that they may hire new employees because they have been turned down by the banks, even though they have an excellent balance sheet.


The Fed should be on top of this and show Small Business and the Middle Class that they know what's going on. Just because the market goes down does not mean we will fail as a country. It just might mean we can put our citizens back to work, increasing out domestic product and growing the market out side of the bubble we know they have created. This bubble will be proven as soon as the Fed begins to tapper unless they can come up with a solution that borrows to small business for the sole purpose of putting Americans back to work.


Who is the better choice hear one million unemployed middle class Americans many of which are 50 or older that have a mentality of a stable job is what they Know, or we can continue to give money away in the form of unemployment, well fair programs, food stamps, early government retirement programs, (another form of well fair) That the average American pays for through tax's that are bringing the working class to there knees with tax burdens while wealthy co such as Apple pay no tax's and actually get subsidies. (your Tax dollars)


 Maybe we are not as intelligent as we believe. Unless being Intelligent means one man or company being able to take advantage of our country's programs and its tax paying base.


Disclaimer... I am a 50 year old American with some college, Average middle class, Who is not blind nor ignorant and an American attitude that say's I will succeed despite the foolishness of others.         

Sep 16, 2013 8:28AM
Simply put, keep the merry go round spinning at any cost.  There is a golden ring, but only the rich are riding.
Sep 15, 2013 4:43PM
You need to go to the emergency room 

Delusions are false beliefs or misinterpretations of events & their significance. For instance, a person may get accidentally bumped in the subway & may conclude that this is a Government plot to harass him. He may be awakened by noise from his neighbors apartment & may decide this is a deliberate attempt to interrupt his sleep. Everyone tends to personalize & misinterpret events, especially during times of stress or fatigue. What is characteristic of the schizophrenic however, especially during an acute period, is that the conviction is fixed & alternate explanations for the events experienced are not even considered. Usually attempts at reasoning or discussion about possible other meanings of the bumping or the noise in the night can only lead to the further conviction that the reasoner must be in on the plot, too. Arguing with a delusion only leads to further mistrust or anger. The beliefs are tenaciously held, against all reason, & they are characteristically not shared beliefs. They are held only by the person himself & by no one else.

Sep 14, 2013 6:05PM
There were only five Countries remaining of the 195 Sovereign Worldwide States who had banking systems NOT under the direct or indirect control of the Rothschild Family Banking Empire (now worth over 700 trillion dollars). They included Iraq, Afghanistan, Iran, North Korea, and Syria... two forced to capitulate, three remaining who resist. That fact alone should tell you whose interests are fundamentally being represented by subsequent financial decisions.
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Image: Bill Fleckenstein, MSN money

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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[BRIEFING.COM] The stock market finished the Tuesday session on the defensive after spending the entire day in a steady retreat. The S&P 500 (-0.6%) posted its third consecutive decline, while the small-cap Russell 2000 (-0.9%) slipped behind the broader market during afternoon action.

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