Numbers and Prices

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

            The Federal Reserve is fully committed to its asset-propping strategy: It will raise the economy by lifting asset numbers.

            This is where it is important to remember the Federal Reserve does not care about economics. The economists at the Fed are central planners. It's not that they don't like economics, they simply are not interested in, so ignore, economics. Those of us not so inclined think of asset numbers as prices, be they shares in the S&P 500 or wheat germ. But the Fed operates in an abstract world; humanity is a distraction.

            At the moment, the Fed's asset-lifting model deigns that the economy, which is a derivative of asset-lifting, will pass muster when the S&P 500 rises another 500 points and house prices rise another 11%.

            These numbers have been typed into the Fed's model. It summons variables to achieve those levels. One supposes the waning influence of QE (looking at the increasing units of QE needed to lift stocks or houses to a specific number) demands a higher level of QE.

            The Fed is currently buying $85 billion of Treasuries and mortgages each month. This will remove about $1 trillion of securities from the market in 2013 (85 x 12). The effort should be aiding its residential real-estate goal, since a large part of the U.S. mortgage market is moving onto the Fed's balance sheet.

            Yet, there are reasons to think the house-lifting program is waning. One of the more interesting developments is the widely reported tactic of house builders holding inventory off the market, or not building houses, to raise prices. Whether true or not (or, whether it matters or not), there seems to have been no reaction. What would Eric Holder's Once-in-Awhile Justice Department do if Big Oil or Big Pharma announced it was doing the same? This is another (supposed, in this case) example of tolerated flim-flammery in the Crony Capitalist growth model.

            The Fed has not boosted, nor talked beyond, its $85 billion a month asset-absorption (and money-printing), since, in April 2013, the Bank of Japan commenced its $80 billion a month of magic wand waving. That is $165 billion of magic money emitted each month by the central banks of the U.S. and Japan. They are not alone: "ECB Says Bond-buying Program is Unlimited" (Reuters, June 9, 2013)

The Japanese experiment is not working as planned, maybe it's early, or maybe another $80 billion a month will be introduced. Some recent headlines: "Yen Drops After Abe Adviser Says BOJ Can Do More" (Bloomberg, May 28, 2013) "BOJ Beat: Mortgage Rates Rise" (Wall Street Journal, June 1, 2013) "Bond Fund Smack-down as 10-Year Treasury Yield Surges" (Reuters, May 29, 2013) For the callous observer, watching everything Chairman Bernanke taught, wrote, and preached turn into its opposite is a delight.

            Continuing in that vein, asset exuberance is slowing down. A new issuance of Rwanda bonds would probably not pass muster today.  (See: "Big Money") Some recent headlines show the change in tone: "Apple Wows Market with $17 Billion Bond Deal" (Reuters, May 1, 2013) "Rising Mortgage Rates, Home Prices a Lethal Brew" (Yahoo, May 29, 2013) "U.S. Bond Funds Suffer Second-biggest Withdrawal Since 1992" (Bloomberg, June 7, 2013) "This is Increasingly Looking Like an Emerging Market Meltdown" (Business Insider, June 11, 2013) "Global Sell-off Hits U.S. High-yield Market (TD Waterhouse, June 11, 2013) "Apple Bonds Lose 9% in Six Weeks" (CNBC, June 12, 2013) "Rising Mortgage Rates Elicit Fears They Could Hurt Recovery" (Washington Post, June 18, 2013) "Mortgage-bond Failures Reach Most in 2013 as Prices Drop" (Bloomberg, June 20, 2013) "Fed Chairman Bernanke Optimistic About the Economy" CBN News, June 20, 2013) "Drunken Ben Bernanke Tells Everyone at Neighborhood Bar How Screwed Up the Economy Is" (The Onion, August 3, 2011)

            Central planning is failing. This means we will get more of the same. After that, the central banks plan to hand out money. Gold fell below $1,300 and silver below $20 on June 20, 2013. Get it while it's cold. 

A Quarrel in a Far-Away Country between People of Whom We Know Nothing

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)

            Even for those living on a distant continent, the confiscation of state-guaranteed bank deposits in Cyprus is a reminder. (At this stage, it is not clear the Eurocrats will succeed.) Governments and central-banks blew their capital to save a financial Ouija board - not system - in 2008. Former Federal Reserve Chairman Paul Volcker reminded an audience last week there is no financial system: "And what I'm talking about is the international monetary system.  Of course you know it's hard to call it a system. A system concerns itself with some interrelated parts and a mechanism that are working together to produce some stability and progress.  That's hardly a description of the international monetary system.  And as many people have said, 'international non-system.'"

            The arbitrary decisions made by Americrats and Eurocrats in 2008, of what to save and what to sink, must veer towards sinking more and saving less in 2013. It has been noted the decision to confiscate bank deposits in Cyprus was a stupid move instituted by the acronyms (ECB, EU, IMF, G-somethings). This should remind residents in other countries that, first, what is theirs isn't, and second, relying on logic (e.g., "the government wouldn't do that, it would be shooting itself in the foot") is not a wise path to self-preservation.

            First, and foremost, the capital on which the bureaucrats can draw is low. That is financial, political, and psychological capital. In 2008, the central banks and governments stood behind the public's bank deposits and panic subsided. The veneer is much thinner now. Again, logic is not the path to estimating when the public recognizes its exposure, since that should have happened so long ago. These are states whose authority only exists as long as their paper-currency bills are trusted. (Yes, buy gold and silver).

All that is left is central-bank, money-printing and assurances of future money-printing - sometimes in the form of guarantees. The guarantees have been recklessly awarded. Revenues are harder to come by. Apparently - at least this is the current story - there was no other source of funds to back the failing Cypriot banks. The Eurocrats had drawn a line in the sand. They would only award X euros to save the banks. Cyprus had to supply the rest. The Euros would not accept debt issued by the Cypriot government as good collateral. (This is farce, given what is permitted.) Where to turn? The bond holdings in the banks were insufficient to make up the difference. Tax receipts are also insufficient, but the arbitrariness of what can be taxed and what constitutes a tax is constantly redefined in the western so-called democracies. So, the Cypriot government announced that bank deposits are hereby taxed - confiscated - to fund the deficiency. What value should bank customers place on deposit insurance in other countries?

Resourceful is spreading - reading a new interpretation by the minister of finance and administration in Spain. From El Pais, on March 19, 2013: bank deposits can be taxed since this would standardize taxes across regions. I have no idea what that means, not speaking Spanish only being one problem. Its importance though, should it be imposed, to the average Spaniard, is not the clumsy legal route to confiscation, but: "the government is taking my money."

Looking to the day of reckoning in the U.S., there are two other potential sources: private or public investment. Cyprus and Russia are negotiating now; Russia potentially supplying the missing capital. Foreign investors made the mistake of supplying U.S. financial institutions with capital in 2008. For the most part, that did not work out well for the investors. Cyprus is much smaller, though. Could Cyprus and Greece join a new ruble block?

Those with assets in the U.S. are well aware of resourceful money grabs by the government in recent years. Theft from General Motors bondholders is an example. When the Federal Reserve is buying 100% of the U.S. Treasury issues and bond yields are rising, the U.S. government will probably apply new confiscatory taxes on savings, investments, and assets. (U.S. Treasury gold holdings will become a point of contention, to express this vaguely, at some point.)

To look optimistically, the discrediting of the power brokers can not come too soon. These awful people are now so bereft of tolerable choices they write the script for their original sin when they speak. On March 19, 2013, German Finance Minister Wolfgang Schaeuble told "lawmakers" the current problem is the result of "a failed business model over decades." Schaeuble is acknowledging the euro was always a façade, a means to a different end than a functioning currency. If those who launched the euro wanted to establish a currency, a currency that required trust across borders in an experiment never before attempted, they would not have plagued it with bubonic pathologies.

Their intention was command and control, as the most prescient critic, Bernard Connolly wrote in his 1995 book, The Rotten Heart of Europe (a new edition was published in 2012): "My central thesis is that the ERM [Exchange Rate Mechanism] and EMU [Economic and Monetary Unit] are not only inefficient but undemocratic: a danger not only to our wealth but also our freedoms, and ultimately, our peace. The villains of the story... are bureaucrats and self-aggrandizing politicians." Monetary union "is a mechanism for subordinating the economic welfare, democratic rights, and national freedom of the European countries to the political and bureaucratic elites whose power-lust, cynicism, and delusions underlie the actions of the vast majority of those who now strive to create a European superstate. The ERM has been their chosen instrument and they have used it cleverly."