Wednesday, May 22, 2013 - Throwing Ben From the Chopper

Throwing Ben From the Chopper

by Sinclair Noe

DOW – 80 = 15,307
SPX – 13 = 1655
NAS – 38 = 3463
10 YR YLD +.08 = 2.03%
OIL – 1.53 = 94.65
GOLD – 6.30 = 1370.70
SILV - .16 = 22.37

Federal Reserve Chairman Ben Bernanke went to Capitol Hill this morning and that was followed by the release of the Federal Open Market Committee, or FOMC, minutes from their May 1^st meeting and that was followed with a big swing lower for stocks on very heavy volume and a big swing lower for bonds and everything was just rocking and rolling.

Bernanke was appearing before the Joint Economic Committee this morning; the gavel fell; Bernanke delivered some prepared remarks: "A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further."

So, that sounded like no tapering off of QE anytime soon. Stocks and bonds inched a little higher. Bernanke went on to say that fiscal policy continues to be a drag on the economy. Right, we've heard it before.

Then, Bernanke stressed that slowing asset purchases would not be the automatic beginning of the exit. The flow of purchases could be ramped up depending on the data. Now, the markets were trying to figure out which direction he's going.

Asked when the Fed will slow down asset purchases, Bernanke says it could come in "next few meetings”, but he won't give a date. Then he says financial stability is biggest risk of asset purchase program, but a weak economy comes with its own stability concerns. Then he says the Fed does not have to sell any agency mortgage-backed securities when the central bank exits its easy policy stance. The markets start to tank.

Is the Federal Reserve doing too much to stimulate the economy, or not enough? Many of the questions directed at Bernanke this morning were about the risks of the Fed doing too much and whether their monetary policy was hurting savers and creating asset bubbles. An equally valid question is whether the Fed is pushing hard enough, given that the economy is growing more slowly than the Fed wants it to and the jobs market remains stagnant and inflation is running well below its target.

Helicopter Ben, the student of the Great Depression willing to throw cash out of a helicopter; that Fed Chairman was nowhere to be found; replaced by a Chairman willing to stand pat despite failing to achieve the Fed’s own self-imposed targets.

Bernanke isn’t ruling out stronger action. In his testimony he said that depending on incoming data, “we could either raise or lower our pace of purchases.” But raising purchases is clearly not Plan A. As the outlook for the labor market “improves in a real and sustainable way, the committee will reduce the flow of purchases,” the chairman said, without specifying a time.

Bernanke says for the record that the Fed could do more if necessary, but he is behaving as if he believes monetary policy is at or near its limit. He testified: “Monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.”

That doesn't really sound like Helicopter Ben. Has he lost his swagger? Hang on. He's saying the Fed is willing to hold on to all the Mortgage Backed Securities they've been buying, maybe just stick them in the vault and wait; that is not an acknowledgment of failure in monetary policy, but it is looking like an acknowledgment of asset bubbles.

And then we got the FOMC minutes.

The FOMC minutes showed they were still waiting for more progress before they would slow Quantitative Easing, but they were thinking about an exit plan; they discussed the old plan form 2011, debated whether it was still valid or needed updating, talked about the possibility of slowing asset purchases as early as June, that didn't fly, and then the punchline– assett bubbles.

The FOMC minutes say, in writing: "a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant.... One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability."

The big question is whether the Fed will actually have a mutiny and throw Bernanke from the helicopter and abandon super-easy monetary policy? So, let's dig a little deeper into the minutes: “Regarding the composition of purchases... ,in light of the substantial improvement in the housing market and to avoid further credit allocation across sectors of the economy, the Committee should start to shift any asset purchases away from MBS and toward Treasury securities.”

Where do we go from here? The Fed holds on to its existing asset purchases; they won't shy away from ZIRP, the Zero Interest Rate Policy; they are getting closer to using some new tools, and it's probably more than just a shift from MBS to Treasuries. What tools? We didn't really get a clue today, but we did get some acknowledgment that they recognized the limitations of the tools they've been using. So, we should be looking for new tools, or look for Bernanke to be tossed from the helicopter – it could go either way.

The latest poll of Morgan Stanley's top clients from across the world says it all. Not a single investor at the bank's Florence forum thought the world economy would rebound with any strength later this year.

Just a quarter expect a return to trend growth. Some 57pc think there will be no escape from the "twilight" conditions afflicting the western world, and 20pc expect an full-blown global recession. That is a remarkably bearish set of views. Yet the same investors are overwhelmingly bullish on stocks and property.

This schizophrenic exuberance seems entirely based on the assumption that QE and central bank largesse will keep the game going, flooding asset markets with liquidity. Indeed, 80pc think the ECB will cut rates again, and half think it will have to swallow its pride and join the QE club in the end.

Eighty percent think equities will gallop on upwards over the next year. Complacency is rife. It became very clear, and many investors were quite explicit about this, that markets are lulled by the lure of liquidity resulting from negative real interest rates and global QE. When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.

Yesterday, shareholders at JPMorgan Chase decided to keep Jamie Dimon as chairman and CEO. The shareholders trying to take away Dimon's chairmanship weren't trying to take the job of running JPMorgan away from him. They just wanted to give the board's oversight function to somebody else -- they didn't want Dimon being his own boss. But even this minor tweak to Dimon's job function would have been such an outrageous affront to Dimon's royal personage that he might have taken his indispensable skills away from the bank forever, causing the stock price to collapse, or so the bank told shareholders, at least in private. Jim Cramer said it publicly: "If you voted for Dimon to lose chairmanship, you voted for a lower stock."

The Office of the Comptroller of the Currency cut it's rating of the bank's management and says it need simporvement, but shareholders weren't buying it. Last weekend I heard one analyst explain that concerns about out of control trading, and the trading losses of the London Whale, and allegations of money laundering, institution wide regulatory violations, and auditors that are on the verge of throwing up their arms; for a complete list of violations, there is a report entitled “JPM – Out of Control” , which basically describes a criminal enterprise. Any way, the analyst over the weekend was saying that shareholders should forget about all that because Dimon delivers record profits, and that's all that really matters. Rather than humbling Dimon, JPMorgan shareholders have declared, loudly, that Dimon alone should hold their fate in his hands. They had better hope it doesn't go to his head.

Hurricane Sandy was the deadliest and most destructive hurricane since Katrina. It caused 285 total fatalities and was the second-costliest hurricane in United States history.

During the immediate aftermath of this act of Nature, Senators Inhofe and Coburn from the state of Oklahoma, were among many who decided to use the disaster as a political platform. They voted against a full FEMA / Army Corp of Engineer reconstruction, and repeatedly delayed votes to fund any for of rescue. The Republican Governor of New Jersey went postal against the GOP House members as well as these two Oklahoma Senators. Eventually, federal aid for Hurricane Sandy was passed. A big chunk of the Sandy emergency package replenished FEMA, which had been underfunded by the usual suspects. The Sandy relief package replenished its coffers. The votes in favor of Sandy Aid ironically funded FEMA, and it is helping with the rescue and clean up efforts in Oklahoma. Now Coburn is insisting that any federal aid to deal with the tornado in his home state must be offset by budget cuts, but he says that “as the ranking member of Senate committee that oversees FEMA, I can assure Oklahomans that any and all available aid will be delivered without delay.”