Bernanke Admits He’s Clueless On Economy’s Soft Patch

Interesting times from both a fiscal and as well as a monetary perspective...With Bernanke doing 'all' that he can do on the monetary front how will our fiscal policy 'monitors' deal with their end of our economic malaise? It all sounds so "Greek" to me!
It shall be very interesting to see what happens when the Fed begins to 'deleverage' their balance sheet and liquidates those 'bought assets' that 'saved' us from deflation.
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Bernanke Admits He’s Clueless On Economy’s Soft Patch

Jun. 22 2011 By AGUSTINO FONTEVECCHIA, FORBES

In his second post-FOMC press conference, Fed Chairman Ben Bernanke touched on every topic, admitting that the recovery was weaker than expected and that beyond temporary factors like supply chain disruptions in Japan and high energy prices, he was at a loss as to what was causing the soft patch. In a Q&A session with reporters, Bernanke said a disorderly default in Greece would have significant effects on the U.S. economy, while adding that Fed still had several tools at its disposal the to pump up the economy.

With markets at a crossroads, amid a cooling economic recovery and a dangerous Greek crisis threatening the euro and the global economy, reporters grilled Bernanke and asked many of the right questions.

Brutally honest, Bernanke admitted that he had no clue what was actually causing the current fragility in the U.S. economic recovery. While the FOMC statement assigned blame outside of the U.S., pointing at Japan along with rising food and oil prices, Bernanke was put on the spot by a reporter who noted the inconsistency behind that explanation and a lowering of long term forecasts. Bernanke took the hit, admitting only some of the factors were temporary and that he didn’t know exactly what was causing the slowdown, but that it would persist. “Growth,” said Bernanke, “will return into 2012.”

“Bernanke was just summing up what has happened in the markets, what has been priced in,” explained Nick Kalivas of MF Global. “But the Fed has taken extraordinary measures to support the economy, they have done what they can and monetary policy isn’t a solution for everything,” added Kalivas, pointing at problems with the fiscal situation and the debt ceiling debate.

The Fed chairman was explicit about the situation in Washington, directly slapping Republicans in the face saying “I don’t think sharp immediate cuts in the deficit would bring more jobs.” Having made clear before that Congress should raise the debt ceiling, Bernanke explained budgetary problems are very long run in nature.

Taking his time to address the situation in Europe, and the increased urgency of the crisis in Greece, Bernanke said U.S. bank exposure to Greek was minimal, and only indirect via positions in large, core-nation banks in Germany and France. Raising a red flag, the bearded academic said that money market mutual funds had substantial exposure to those same banks and could take a big hit if push comes to shove in Europe. “A disorderly Greek default would have significant effects on the U.S.” economy, he added.

Patting himself on the back, Bernanke once again defended his controversial programs of long-term asset purchases, dubbed QE1 and 2. “People don’t appreciate how pernicious deflation could be” for the economy, said the chairman, who then said QE2 saved the economy from deflation and was completely justified at the time. “[Back then] we were missing on both sides of our dual mandate, today we are much closer [to fulfilling it].”

Adding that they had made no decision on interest rates and further asset purchases at the moment, Bernanke listed cutting interest rates on excess reserves held at banks, giving guidance on balance sheet changes, as well as further asset purchases as “additional action we are prepared to take if the situation warrants it.”

Humbled by a question on his stark criticism of Japanese policymakers before the “lost decade,” Bernanke said he’s “a little more sympathetic to Central Bankers now than ten years ago.” Still, Bernanke avoided responding on whether the U.S. could be entering its own lost decade by highlighting the success of his QE policies in averting deflation. “A determined central bank can always do something about deflation.”

The second post-FOMC press conference saw sharper reporters asking the right questions, as opposed to their soft-ball pitching last time. Bernanke, as usual, avoided asking the uncomfortable questions and was even humble enough to admit he didn’t have all the answers. The question is, are we better off knowing Bernanke himself doesn’t know?

a confluence of events

As a confluence of events step onto the economic stage in the upcoming months they shall most surely provide us with very interesting fiscal theater. And as we anxiously watch these events unfold I am sure that we will be glued to our seats with anticipation as to how this melodrama will ultimately unfold.
Who wrote this script anyway?
1) The end of the Fed’s QE2 program
2) The US government’s debt ceiling reached
3) Double dip housing stress
4) Unemployment levels
5) The EU’s PIIGs leverage and growth dilemma
6) China’s inflation rate and slowing growth
7) Continuing strife and unsettledness in the middle east
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Some interesting economic data bits and pieces:

Leverage - The Fed’s Flow of Funds report found the deleveraging process to be continuing as the debt outstanding in US credit market declined to a three-year low of 336% of GDP. While that is down almost 10% (from 363% of GDP) at its peak in early 2009, it remains well above longer-term levels and there is room for the deleveraging trend to continue.

Federal Budget Deficits Are Structural, and Unsustainable - According to the baseline alternative scenario modeled by the bipartisan Congressional Budget Office (the alternative scenario that current policies continue into the future), federal spending on entitlement programs and debt service, alone, will exceed federal revenues in 14 years. Something must change. Either tax collections will have to in-crease or federal spending will have to be cut. Either way, this will drag on GDP for the foreseeable future. The worst-case scenario is more paralysis in Washington leading to a loss of confidence from global investors.

Market Reaction to Conclusion of QE2 Purchases Remains Uncertain -
While our analysis points to there being little market reaction to the end of QE2, this is still yet-to-be-seen. There is certainly the risk that the lack of buying from the Fed will result in higher yields. However, it looks more likely that the bid from other buyers will remain strong and yields will continue to respond to growth expectations, inflation expectations, and the global flight-to-quality. Our expectations are that yields are al-ready reflecting market sentiment and anything more than a 50 bps increase would be a surprise. There are plenty of analysts arguing that rates remaining flat is the strongest likelihood.
(Source: Weekly Outlook)

The Fed Is the Biggest Holder of US Debt

A fascinating set of circumstances has been created with the Fed’s ballooning of their balance sheet. With the end of QE2 in sight and, if we believe what we hear, the ‘non-probability’ of QE3 materializing, I believe that we shall experience some very interesting times ahead. With our country’s debt level, governmental spending habits, growing level of unfunded liabilities and our apparent proclivity to ignore peril until it is upon us, one could not ask for much better drama – the ultimate question being; how will the final act of this traveling show be resolved and how will that effect our country! Also, what will history have to say about our ‘unique’ times?
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June 9, 2011

The Fed Is the Biggest Holder of US Debt

This isn’t new news, but today’s flow of funds report has one nugget that is getting some attention today, so we might as well offer this reminder: The Fed is the world’s biggest holder of US debt.
UniCredit economist Harm Bandholz put together this chart that puts it in perspective.
China is not surprisingly the second-biggest holder of debt. In one hopeful sign, U.S. households are the third-biggest holders. This group includes hedge funds, so we’re not exactly talking the US version of Mrs. Watanabe here.
But you could argue that hedge funds represent wealthy households. And you could more easily argue that US households still hold fewer Treasurys than they did in the past. The hope is that their appetite for Treasurys picks up as they age, helping to make up for some of the demand that will inevitably fade from China and Japan in the years to come.

http://blogs.wsj.com/marketbeat/2011/06/09/the-fed-is-the-biggest-holder-of-us-debt/

Pushing the string

It appears that the yield curve will continue to remain in its current familiar surroundings, notwithstanding a ‘surprise occurrence’ in the financial markets of the world. It would appear that there is not much ‘good news’ around to change the status of ultra low yields on the short end of the curve. One of the key questions moving forward will be – who will buy our debt? With China continuing to ‘unload’, especially in the short end, who will step forward (other than the Fed)? Another interesting item to ponder at this time is: what does an interest rate stress test on the Fed’s currently ballooned balance sheet look like!
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Friday's weak jobs report will likely lead to the Fed maintaining the current target for the funds rate through this year and into early 2012. While most market participants had expected Fed policy to remain on hold through this year, the report showing anemic job growth led to those that had been holding out for an increase to start to throw in the towel.
According to the Fed Funds futures market, the probability of a hike in the funds rate to 0.50% by the end of this year has declined from 14.2% one-month ago to 11.4% now. Similarly, Eurodollar futures are projecting 3-month LIBOR to remain exceptionally low through mid-2012. The implied rate for 3-month LIBOR to March 2012 is 0.47% and through June 2012 is 0.61%.

(Stone & Youngberg Portfolio Strategy Group – June 6, 2011)

Cyrenaic Syndrome

According to Weldon Financial founder, “The EU, like the US, suffers from what we might call the ‘Cyrenaic Syndrome,’ a dynamic linked to the ancient Greek philosophers Aristippus and Hegesias of Cyrene, who, in third and fourth centuries BC, hypothesized that the goal of life was the avoidance of pain and suffering.

Addicts accomplish this through substance abuse. The EU [and the US, we would add] is trying to accomplish this thru pure denial, and an outright refusal to accept that austerity, like sobriety, is the ONLY way to actually deal with the problems it faces.”

Craig Dismuke, The Market Today ONLINE

The US government’s budget stalemate

The US government’s budget stalemate – It shall surely be interesting to see what our fearless (fearful) leaders 'accomplish' over the next several months as they attempt to hash out a budget for our federal government. A budget process that has thus far been less than efficient and effective and politics free!

It makes things interesting when you take into context the basic financial issues that our country currently faces –

1) the belief that government spending is always the first answer to any problem…and still more spending, even if it comes at the cost of significantly higher levels of leveraging our future, is always exponentially better!

2) the age of entitlement has been so ingrained in America's psyche over the last 60+ years thus creating a large and growing portion of our populace that truly believes that the government owes them (ie: is obligated to take care of them from birth to death)

3) the notion that the government has ALL the money available that we shall ever need or want and it will cost us nothing because fewer and fewer of our citizens really know, or even want to know, where the money actually comes from!

4) the role that special interest plays in the grand picture – money is power and power means accommodation and accommodation means the continuing sacrifice of freedoms for everyone else

5) iconic, ‘has been’ legislators that no longer know what daily life in America really is about – they have lost touch with the people who do the living and dying and working and raising kids and paying the bills and spending within their means! Many of these ‘long in the tooth’ congress people have been living in a congressional fantasy land for far too long…

6) and finally – who will be willing to relent in their desire, their drive, their addiction to gain power (the power that spending other people’s money and leveraging to the hilt brings) - the never ending struggle to gain more power and control…

Overview summary of the lessons gleaned from the Great Recession

We have been hearing quite a bit lately about what happened in and to our economy that produced the Great Recession. Numerous economic experts, in addition to a government- sponsored commission (which could not agree on a final report that stipulated their findings), have provided their unequivocally ‘unbiased’ findings and accounts of the debacle. Within all of the ‘findings of causation and fault’, I would say that there are bits of truth scattered among the reams of presented opinions. But only bits.

As a response from the peanut gallery (that’s me), after spending quite a bit of time pondering what really happened, I have put together my summary of the root causations and the lessons to be gleaned from this time of economic distress.

Overview summary of the lessons gleaned from the Great Recession:
Leverage ALWAYS has a limit – over-leverage ALWAYS has a price.

Bubbles ALWAYS deflate (pop) – the only question is the rapidity and the breadth of their destructive wake.

Economic cycles come and go – it’s only a matter of the height, depth, time span and finally, the amount of unemployed.

Rapid price appreciation in any asset class cannot exceed fundamentals for an extended period of time – no matter what the experts say – without a proceeding deflationary adjustment (i.e.: economic pain).

Government policy (fiscal and/or monetary) drives market economic decision- making, thus providing the motivation, or might I say, encouraging, asset value manipulation along the way.

Excesses occur when markets, motivated by policy, progress beyond, ahead of, and/or in spite of, fundamentals.

Government policy-making largess ensures bubble formation – past, present, and future.

Government policy-making is usually short-sighted, and in the instances of crises have a preference for topical, symptomatic band-aid fixes – and pledge to worry about the root causes when the next crisis arrives.

When you play the hyperbole of a heated economic lottery, very few end up winning.

Summation: Time, perseverance, minimal governmental intervention, and a return to foundational financial truths are the quickest way back to sound economic health.

2011 P.R. Barriball