Friday, January 03, 2014 - Trust Me

Trust Me

by Sinclair Noe

DOW + 28 = 16,469
SPX – 0.61 = 1831
NAS – 11 = 4131
10 YR YLD + .01 = 2.99%
OIL – 1.30 = 94.14
GOLD + 15.00 = 1239.00
SILV + .14 = 20.25

Fed Chairman Ben Bernanke will retire from public service at the end of the month, and likely wander off to be a well paid consultant or director at one or more banks or private equity firms. Today he gave what might be his final speech as the Fed head. Speaking at the American Economic Association forum in Philadelphia, Bernanke said that even though the FOMC announced taper in December, they were still committed to highly accommodative monetary policy for as long as needed; "Rather, it reflected the progress we have made toward our goal of substantial improvement in the labor market outlook that we set out when we began the current purchase program in September 2012.”

He tempered the good news in housing, finance and fiscal policies by repeating that the overall recovery "clearly remains incomplete", adding that the number of long-term unemployed Americans "remains unusually high." This is something like the doctor telling you the cancer has been cured but there is still a massive tumor. As of the November jobs report, the labor market has 1.3 million fewer jobs than December of 2007. In a healthy environment, we would have seen jobs added as the population grew; the economy would have needed to add 6.6 million jobs just to maintain the level of December 2007. Counting jobs lost plus jobs that should have been gained to absorb all those people coming into the labor market, the economy had a shortfall of 7.9 million jobs as of November 2013.

So, as QE tapers into the sunset, what tools does the Fed have to juice the economy? Bernanke said the central bank has the tools - including adjusting the rate on excess bank reserves and so-called reverse repurchase agreements, or repos - to return to a normal policy stance without resorting to asset sales. And then he added: "It is possible, however, that some specific aspects of the Federal Reserve's operating framework will change." That sounds a bit cryptic, but remember there is a thing called Permanent Open Market Operations, which is when the Fed buys or sells securities outright in order to add or drain reserves available in the banking system. There is plenty the Fed could do, and most of it will likely not filter down to Main Street.

Americans have a very pessimistic view of our government, and we don't trust elected officials to solve the nation's biggest problem. A new poll by the AP-NORC Center for Public Affairs finds half believe the American system of democracy needs either "a lot of changes" or a complete overhaul. Just 1 in 20 says it works well and needs no changes. The percentage of Americans saying the nation is heading in the right direction hasn't topped 50 in about a decade. In the new poll, 70% lack confidence in the government's ability "to make progress on the important problems and issues facing the country in 2014."

Local and state governments inspire more faith than the federal government, with 45% at least moderately confident in their state government and 54% expressing that much confidence in their local government. Other results of the poll show 86% of those who called health care reform a top priority said they want the government to put "a lot" or "a great deal" of effort into it, but about half of them are "not at all confident" there will be real progress; 65% who consider the budget and national debt to be a priority don't believe the government can fix the problem; 57% say "we need a strong government to handle today's complex economic problems." Even among those who say "the less government the better," 31 percent feel the nation needs a strong government to handle those complex problems.

Simon Johnson is the former chief economist for the IMF; he has written books and some great articles about how the banksters have effectively taken over the government. He provided an update in the New York Times, saying:

When middle-income “emerging markets” encounter a financial crisis because of dysfunctional incentives in the banking system, the obvious reaction is to adopt reforms that make banks safer…Prominent people in other sectors are deeply annoyed at the collateral damage caused by excessive risk-taking by bankers.

And in most middle-income countries, the financial sector comprises at most a few percentage points of gross domestic product…

In contrast, in a country like the United States or Britain, the financial sector is much larger as a percent of G.D.P. – from 7 to 9 percent, depending on how exactly you measure it. This is a direct result of having accumulated more financial assets – a direct result of prosperity and the reasonable desire to save for retirement.

In addition, because rich countries are able to issue a great deal of government debt in the short-term and have central banks with credibility in limiting inflation, they are able to provide very large amounts of support, direct and indirect, that prevent prominent financial companies from collapsing.

There is no sector in the modern United States or Britain that is willing to stand up to big banks in the political arena. And top financial-sector executives continue to enjoy such high prestige that they are still called upon to run public finances.

Five years after the worst crisis since the 1930s, the conventional wisdom in Washington is once again that United States is a bastion of global stability and that it is important for the national interest that the financial sector should remain basically as is.

There is no desire to discuss how financial crises affect fiscal deficits and push up government debt. There is no inclination to recognize that providing support to parts of the financial sector undermines the legitimacy of the central bank.

The rise of finance is a mark of success – and it can also be most helpful to sustaining economic growth. But the political power of big financial institutions means trouble, because it provides cover for a high degree of private leverage that is prone to collapse.

Of course, hardly anyone is calling for a collapse in 2014; maybe a few perma-bears, but it's a tough case to sell. Most forecasters are warning stock investors not to expect another year of 30 percent gains, as there was in the S&P 500 in 2013. When the Federal Reserve said in September that the economy was too weak for the central bank to taper its purchase of securities, stocks went up. When the Fed said in December that it would begin to taper, stocks still went up. When the government shut down, stocks went down for a bit, then stocks went up. There seems to be a trend here, and trends continue until they end. The unanimity of forecasts may be cause for concern.

Each year about this time, people who talk about the markets and the economy are prone to make predictions, and most of them are wrong; some are right or nearly right but that isn't because the person has a crystal ball. Still, many people believe in the crystal ball and believe that some people actually know what stock prices will do and they go on CNBC or Fox and they talk to reporters and they give their money making knowledge away, but you know they don't give away this great knowledge out of pure charitable aspirations to aid humanity. Odds are that their words are designed to make people buy the very stocks in which they already have an investment, or otherwise churn positions for a commission. So, the market analysis is frequently nothing more than a slick sales pitch, and the wildly optimistic or pessimistic forecasts are little more than a way to separate from being lost in the herd.

We have similar problems with economists. If you head a big pharmaceutical company and you want to strengthen your patent monopolies to allow you to charge more money for your drugs for a longer time, there is no shortage of economists who will argue your case, for a nice fee, mind you. If you run an investment bank and you want to avoid regulations and oversight, there are plenty of economists who can be purchased to draw impressive charts and claim that government interference will slow growth and cost jobs. The rules for responsible household budgeting are not the same as the rules for responsible federal-government budgeting. We get economics dumbed down for the masses, or distorted because there is money at stake. There are plenty of economists who, under the influence of moneyed interests, are willing to put forward arguments that don’t fit the data. For this reason, the public has rightly grown skeptical of economists.

And then there are the government officials who are willing to take impassioned stands on behalf of campaign donors, which is just bribery. And so we we don't trust elected officials to solve the nation's biggest problem. We have a pessimistic view of our ability to ever solve our problems. And that's unfortunate because our problems are solvable.