Outside the Box

Uttin’ On the Itz

September 24, 2013

Last Thursday, prior to the FOMC announcement, I was having an early lunch with Kyle Bass so he could get back to the office in time for the announcement. As we were finishing up, I was invited to come sit with another group of friends and traders who also happened to be in the same restaurant. Everyone was sure there would be some type of tapering. That message had been clearly communicated to the markets. When the announcement came, the telephones went off and everyone erupted with various forms of surprise. I fully admit to being speechless. I kept waiting for some kind of explanation, and none came. The more we talked about it and the more I thought about it later, the more convinced I became that this was one of the more ham-handed policy announcements from the Fed in a very long time. Why would you go to the trouble of getting the market all ready for the onset of tapering, build expectations, and then jerk out the rug? What in the wide, wide world of sports is going on?

I’ve been with Louis Gave and David Rosenberg this weekend here in Toronto. Everyone is searching for an answer on the FOMC's move. Louis came up with what I’m affectionately calling his conspiracy theory. He thinks Obama is quite upset that he can’t have Summers as Fed chair and that his staff is crossways with Yellen. Reports suggest she has not even been interviewed yet. Really? If that’s the case then perhaps Obama would rather stick with Bernanke for another two years and then make another try for Summers or maybe even a rested Geithner. Steve Cucchiaro (of $18.5 billion-under-management Windhaven fame) asked if Summers had maybe communicated through back channels to Bernanke that he wanted to end the tapering, and Bernanke was helping him out; but then when he was no longer in the running for Fed chair, Janet Yellen came and said, “Ben, I’m not ready to end tapering yet,” so Bernanke took one for the team.

I heard directly from another friend that he was in the offices of one of the world’s largest bond managers, and they had actually been at the Fed the previous week and were confident there would be a small tapering. Did you see the way bonds got ripped after the announcement? These bond managers were pissed (that’s a technical economics term). Can we trust the Fed now? Years of work building transparency and a confidence in the narrative, and then they blow it on a meaningless non-taper?

This week’s Outside the Box is from Ben Hunt. It echoes some of my own concerns about the Fed and raises others. Quoting:

Two things happened this week with the FOMC announcement and subsequent press conferences by Bernanke, Bullard, etc. – one procedural and one structural. The procedural event was the intentional injection of ambiguity into Fed communications. As I’ll describe below, this is an even greater policy mistake than the initial “Puttin’ on the Ritz” show Bernanke produced at the June FOMC meeting when “tapering” first entered our collective vocabulary. The structural event … which is far more important, far more long-lasting, and just plain sad … is the culmination of the bureaucratic capture of the Federal Reserve, not by the banking industry which it regulates, but by academic economists and acolytes of government paternalism. These are true-believers in too-clever-by-half academic theories such as management of forward expectations and in the soft authoritarianism of Mandarin rule. They are certain that they have both a duty and an ability to regulate the global economy in the best interests of the rest of us poor benighted souls.

This is one of the more incendiary OTBs in a while, and I think you should set aside some time to think on the implications Ben is writing about.

One of the important things the Federal Reserve provides when there is a crisis is that sense that “daddy’s home.”. Whether or not you personally believe the Fed has any significant power to actually do anything, the general market does believe it, and that’s the important thing. Now the Fed is at significant risk of damaging its reputation for decisiveness and clarity. We can only hope there is not another crisis coming out of Asia or Europe in the next few months that would require Federal Reserve action. What could they do now that would actually be credible? And while I don’t see a crisis developing in a short timeframe, it is the things that we don’t see, the Lions in the Grass, that create so many problems. Just saying…

I am at the airport in Toronto as I write this note. Tonight I get to have dinner with my friends Art Cashin, Barry Ritholtz, Barry Habib, Rich Yamarone, Christian Menegatti, and David Rosenberg; and Jack Rivkin may show up a little later. Ian Bremmer is supposed to drop by for early drinks before he heads off for dinner with Prime Minister Abe of Japan. It looks like it will be a spirited evening, with lots to talk about. I am not sure what I will write about this weekend, but I bet I'll get a few ideas this evening.

And speaking of the venerable Art Cashin, I will not be the only one at the table tonight who is mystified by the Fed’s action. And apparently some members of the FOMC agree with Art and me. Art wrote this morning:

 Candor With A Capital C – Yet Again – One of the Fed speakers yesterday was the President of the Dallas Fed, Mr. Richard Fisher.  Mr. Fisher is a favorite of floor traders since, when he speaks, the message is clear, not couched in monetary argot.  He didn't deviate from that habit at all yesterday.

His speech was on current banking trends and a post-Lehman review.  He said that too big to fail banks were "a dagger pointed at the heart of the economy."  At the end of his speech he said:

A Deliberate Deflection

As I said at the beginning of my remarks, I am going to try to avoid answering questions you might have about last week’s FOMC meeting and what some in the press have now labeled “the taper caper.” Nearly every Federal Reserve Bank president and his or her sister will be speaking to this topic this week, so you will be getting an earful of cacophonous comments on this subject.

Today, I will simply say that I disagreed with the decision of the committee and argued against it. Here is a direct quote from the summation of my intervention at the table during the policy “go round” when Chairman [Ben] Bernanke called on me to speak on whether or not to taper: “Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question.” I believe that is exactly what has occurred, though I take no pleasure in saying so.

While he may have deflected further questioning on the "taper caper," he did not deflect all questions.  Again his candor brought headlines.  Here's a bit from Bloomberg on the Fed Chair succession:

"The White House has mishandled this terribly,” Fisher said today in response to a question from the audience after giving a speech in San Antonio, Texas. “This should not be a public debate,” he said, adding that the Fed “must never be a political instrument."

On another question, Mr. Fisher apparently said that although Janet Yellen was dead wrong in her policy direction, she would make a great Chair.

We doubt that Mr. Fisher ever hears the question, "What exactly do you mean by that?"  We could use more such candor elsewhere. 

You have yourself a good week, and I’ll report back. And now sit down while we hear from Ben Hunt.

Your wishing he knew what was going on in Bernanke’s head analyst,

John Mauldin, Editor
Outside the Box

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Uttin’ On the Itz

By Ben Hunt, Ph.D.

High hats and arrowed collars, white spats and lots of dollars
Spending every dime, for a wonderful time
If you're blue and you don't know where to go to
Why don't you go where fashion sits,
Puttin' on the Ritz.
– Irving Berlin

Hegel remarks somewhere that…

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Mike Fahey

Sep. 27, 2013, 11:36 a.m.

How anyone could be surprised by the Fed’s inaction on taper, given the events that occurred in emerging markets after Bernanke’s initial remarks, eludes me.  No national economy, no matter how small, is entire of itself anymore, [e.g., Cyprus], and the change in risk perception and bond rate increases following Bernanke’s initial remarks not only became a threat to the financial stability of the global emerging markets sector, and threatened to infect weak first world economies as well.  Like it or not, the Fed is now the central bank of last resort for the world, and their really dumb comment that the world would just have to adjust to US priorities died an almost immediate death.  They are locked in to a course of action that has no good endgame, cause eventually every economy is going to tank, perhaps in sync with Fed actions to reduce QE, or more likely, some black swan event that can’t be mitigated.  But no one that heads the Fed is going to want to have it happen on their watch, so they will continue to do something that looks better than doing something that does immediate damage or just saying we don’t know what will work and drive risk perception into total panic.

Bill Bowman

Sep. 26, 2013, 11:28 a.m.

Now what do the academics teach at business school?  As chaos theory replaces MPT ... What does Fed Omnipotence replace? Spot on and further evidence of the soft tyranny encroaching upon our personal liberty, how sad. Bill

Ronald Nimmo

Sep. 26, 2013, 5:25 a.m.

Fisher’s comment notwithstanding, I think Mr. Bernanke has been clear all along that his actions on QE 3 could be one of 3 things: Taper down QE 3 bond purchaes, keep the same level of QE 3 bond purchaes, or increase the level of bond purchases. He has consistently said that his decision was a moving target based on the most current economic data available to him as well as his interpretation of the information it provided. The people who are so indignant that he misled them are the ones who made the wrong guesses or who had out-of-date economic data. Bernanke did exactly what he said he would do, and he is not responsible for their failure to understand plain English.

Steven Smith 26339

Sep. 26, 2013, 12:28 a.m.

I haven’t read the whole article yet, which I’m going to like all the other ones with my cup of coffee.

But 2 day’s before I wrote in a comment section of a day trading class that I would say “Don’t make any announcements this time.”

I missed the whole Wednesday trading day traveling.  Except for Gold futures moving $60 dollars on that day I haven’t been able to figure out if I missed anything yet.

Well, my Uncle the Civil Engineer once told me they don’t make major government decisions like that in the month of September.  That is because it still is regarded as Summer time. 

Also, this article is another example of how well educated some people are.  Because some of the public that I’m around everyday wouldn’t even come close in describing anything resembling that this article is like.

Just throwing out my comparisons of apples and oranges.

Greg Fridholm

Sep. 25, 2013, 9:59 p.m.

Yadda. Yadda.

Sell stocks and bonds, buy gold and bit coin.

Or maybe not.

Dallas Kennedy

Sep. 25, 2013, 4:31 p.m.

It’s unlikely that QE has anything at all to do with the real economy, apart from small wealth effects and negative effects on investment. It’s all about supporting government borrowing and reflating assets.

Michael Gorback

Sep. 25, 2013, 1:37 p.m.

Great article except Dr. Hunt forgot to cite the single most relevant quote:

“It is an age-old Washington axiom that there is nothing so permanent as a temporary government program.” Senator Wallace F. Bennett 1964 (often attributed to Reagan or Friedman)


Sep. 24, 2013, 10:45 p.m.

As I read this prescient albeit sobering article I could not help but think about a quote I read years ago. It was “and they made for themselves idols. Idols to their own destruction.” Hosea 8: 4

Robin Day

Sep. 24, 2013, 9:38 p.m.

I believe QE is now about replacing monetary outflows in order to maintain a certain velocity of money and stem deflation. Until trade deficits reverse trend, and foreign purchases of treasuries pick up, and US corporations start repatriating off shore profits, QE shall stay and if anything be increased.  Under current circumstances, mild tapering will likely trigger a recession, and cancelling QE would likely trigger a depression…..

Michael Sipos

Sep. 24, 2013, 8:13 p.m.

I don’t get it.  The Fed was very clear….tapering if the economy continues to improve.  It didn’t so no taper simple as that.  It actually would have been very strange if they decided to taper in the same meeting they lowered their forecast for growth and inflation!