Wednesday, January 29, 2014 - Benny Jets

Benny Jets

by Sinclair Noe

DOW – 189 = 15,738
SPX – 18 = 1774
NAS – 46 = 4051
10 YR YLD - .07 = 2.67%
OIL – 01 = 97.40
GOLD + 12.00 = 1268.70
SILV + .15 = 19.81

You’ve heard the old post office creed; “neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds.”

Generally true, however I bet some letter carriers are having a tough time delivering mail in Atlanta today. The Federal Reserve apparently has a creed. Who knew? Neither a disappointing December jobs report nor turmoil in emerging markets nor gloom of the US economy shall stay these central bankers from the incremental completion of their taper.

Don’t worry; nothing to look at here; keep moving, keep moving. No sonny, that’s not a train wreck on Wall Street, that’s just the debris and detritus stirred up by the whirlybird which will now carry Helicopter Ben into the sunset, or more accurately to the boardroom of some investment bank. Yes, this is the last FOMC meeting for Ben Bernanke. He promised he would set a course for exiting QE, and he has; the problem is that the set course is fraught with perils.

The Federal Reserve’s policy making Federal Open Market Committee wrapped up a two day meeting today by announcing they would cut back their bond buying program by $10 billion, to a mere $65 billion per month.  The FOMC added that it was “likely” to continue the pullback, suggesting a similar cut is probable at its next meeting, in March. The stock market fell for the fifth session out of the past six, wiping out yesterday’s gains, but stocks were already moving lower before the Fed announcement.

While noting recent weakness in the housing sector recovery the FOMC statement says the overall economic picture continues to improve. And then the statement included a little slap on the wrist for Congress: “Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy.

The Fed reiterated their view that "risks to the outlook for the economy and the labor market as having become more balanced," language they added to the statement for the first time in December. They reconfirmed that they will likely keep interest rates in the near zero range even if the unemployment rate drops below the target of 6.5%. And just remember your mantra: tapering is not tightening, tapering is not tightening.

And if taper leads to a little turmoil in emerging markets, well what’s it to you? The Fed pullback is contributing to a global shift in investments. That is causing problems for countries like Turkey, which would the example du jour.  The central bank in Turkey tried to bolster that nation’s currency yesterday by sharply raising its benchmark interest rate. The Turkish central bank increased the rate for one-week loans to banks to 10% from the previous level of 4.5%. The idea was to lure investors with a better yield, instead it may be causing collateral damage to the rest of its economy.

And today, the Turks learned the meaning of the old axiom, “don’t fight the Fed”, as the Turkish lira slumped, along with other emerging market currencies. The Russian ruble took another hit, the Argentine peso continued to plunge, and the South African rand could not be shored up. The South Africans raised rates a more subtle half-percent from 5% to 5.5%.

We used to identify the fast growing emerging markets as BRICS – Brazil, Russia, India, China, and South Africa. Now the new catch phrase is the “fragile five” and it refers to the emerging economies of Turkey, Brazil, India, South Africa and Indonesia as economies that have become too dependent on skittish foreign investment to finance their growth ambitions. The term has caught on in large degree because it highlights the strains that occur when countries place too much emphasis on stoking fast rates of economic growth.

Actually, the emerging market turmoil may be working in the Fed’s favor. Investors concerned about emerging market risk are seeking out the safe haven of Treasury bonds, bidding up prices and pushing down yields even as the Fed pulls back from bond purchases. But there are limits to how low the Fed can push emerging market currencies. The declines could come back to bite the developed economies of the US, Europe and Japan. Developing countries have served as engines of global growth, but now they find their purchasing power diminished and that equates to buying fewer exports. The direct effects of the recent emerging market foreign exchange turbulence, if contained, are not likely to prove substantial, but that’s based on the idea that things don’t deteriorate from here.

It makes for challenging times for the central bankers of emerging economies. The flight of foreign capital, which is a primary reason for the currency declines, is a result of investors’ putting money back into developed countries as their economies improve. To counteract the outflow of capital, the policymakers lure investors with higher interest rates but higher rates put the brakes on economic growth. And currency investors know this and bet that the central banks won’t be able to keep rates high for long. Sure enough, in today’s case of the Turkish central bank, the currency sharks smelled blood and they killed off the policymakers last vestiges off credibility.

All the blame for the problems in Turkey can’t be laid at the feet of the Fed; the Turks had a big mess before the taper. There has been an extensive corruption probe against the government and Prime Minister Erdogan responded by purging the judiciary and the police force.

The world can be chaotic at times, but we usually muddle through, except when it gets too crazy. Whenever we talk about emerging market turmoil, we’re reminded of 1997, when the Fed raised rates just a little and a few months later, the hot money went flying out of the developing Asian markets, then Russia defaulted, Long Term Capital Management missed that bet, and wham, bam, it was a meltdown man.

Of course, back then we didn't have hundreds of trillions of dollars in derivatives to contain the risk. Nowadays we have more than a quadrillion in derivatives to protect us. What could go wrong?

And that brings us to our next question of the day: what the heck is a MyRA?

Did you catch that last night during the State of the Union speech? A quick and stumbling reference to My-aye-aye-aye-RA. Obama promised to use executive action to create a new middle class savings vehicle, although he didn’t explain what it was. So, the White House issued a briefing sheet to explain that the MyRA, or My Retirement Account, is a new simple, safe and affordable “starter” retirement savings account that will be available through employers and help millions of Americans save for retirement. This savings account would be offered through a familiar Roth IRA Account and, like savings bonds, would be backed by the US government.

The administration noted that many private-sector providers don’t allow “smaller balance savers” to open accounts; providers who do allow such accounts often charge fees that can eat up a proportionately high percentage of their balances. In his address, Obama described the myRA as “a new savings bond” that “guarantees a decent return with no risk of losing what you put in.”

Today, Mr. Obama signed a presidential memorandum to create the "myRA" program, which he told employees would go toward "making sure that after a lifetime of hard work you can retire with some dignity." The retirement accounts can be opened with as little as $25, and monthly contributions can be as little as $5, automatically deducted from paychecks. The program will operate like a Roth IRA, so contributions would be made with after-tax dollars. That means account-holders could withdraw the funds at any time without paying additional taxes.

The funds would be backed by US government debt, similar to a savings option available to federal employees, and earn the same variable interest rate return as the Thrift Savings Plan Government Securities Investment Fund accounts that federal employees enroll in. Investors could keep the accounts if they switch jobs or convert them into private accounts, and once the account reaches $15,000 funds must be withdrawn or it can be rolled over into a private sector Roth IRA. Treasury Secretary Jack Lew will be in charge of setting up the program and it should be available through some employers by the end of the year. Workers can invest if they make less than $191,000 a year. Businesses will not administer or run the accounts. They will simply offer them to their employees if they decide to participate.

There are still some details of the plan that are not quite clear. The Federal Thrift Savings Plan caps contributions to 10%, and there are rules on what investments are made. Already we are hearing the loons come out with conspiracy theories. This is not – repeat NOT – an effort to confiscate existing IRAs. It is a little like the old Savings bonds that you used to buy, which were actually a decent deal; not a big wealth builder but a decent savings vehicle.

There was plenty more to the State of the Union speech, but you probably slept through that part, so I’ll give you a quick recap: The state of the union is absolutely fantastic for the top 1%, and for about 25% it’s decent, and for the rest of the country things are pretty lousy. Fifty years after the declaration we can now announce that the War on Poverty has been won. The poor and the middle class have been defeated.