Monthly Archives: August 2011

Walk it Back

In simpler times the Fed could configure a forecast of future activity and inflation and fine tune policy toward that objective. When Bernanke and Co. shifted to a monetary (quantitative) regime we worried that they did not establish a robust compass to steer by. Volcker's focus on the M's now had 25 years of scrutiny. "Credit easing" was the original faux metric. A randomly selected size of the balance sheet was next.  Now, Nominal GDP, inflation and unemployment targets are being discussed. The process need not be this confusing.

The Fed forecasts for growth and inflation are not tracking reality. If the objective is to target the forecast, then some additional action is warranted. The alternative would be voicing strong language that the projections were still intact. The Fed has opted for a sketchier, allegedly more flexible, approach. Pilots call it flying without instruments. Thus, as the minutes of a contentious 3 dissent meeting were released, Fed spokesmen were trotted out in various formats to "walk back" the difference of opinions.

Central Banks are, by definition, domestic institutions. That Europeans failed to realize this should not deter the Fed from its mission.  Bernanke must long to deliver the Col. Jessup line to critics (paraphrased): "You sleep under the blanket of protection that I provide then challenge the manner in which I provide it. I'd  prefer you just say thank you and go about your business." The bottom line is all too obvious. The hoped for growth path, marginal as it was, will not be achieved. In typical Pavlovian fashion, more stimulus is dialed up. The consequence is loss of efficacy. We think the 2 day meeting should set a hard target (unemployment rate out) and adjust or hold policy to achieve it. The rest is theater.

Enter Filletino

Austerity is such an unpopular policy that an Italian town (led by its "mayor") has decided to opt out. Rather than be forced to cut and combine agencies with its neighbors, Filletino has elected to print its own currency, the Fiorito. Worth its weight in Fritos and sporting the mayor's picture, the Fiorito is a feeble attempt at revolt. In the context of the crisis it is a harsh reminder that resolution remains a future event at best.

In other news about colored cotton fiber, the Renminbi marked a new high against the greenback. An official move of greater magnitude, say 6% even, could have a positive impact. The Euro rallied on the Greek bank news yesterday. The Italians placed some rollover debt today. The problems remain significant and, as we warned yesterday, Merkel is in the hot seat. The Euro is sitting back a penny today.

The debt problem is well documented. What you are going to get paid back in ( if at all) is heating up again.

Angela Merkel, Burning Man

The markets are rallying as focus leaves Irene and picks up on last week's pop. Weekend papers in Germany put down early speculation of a Merkel/Sarkozy deal forming with more political integration and Pan-Euro bond issuance. Merkel's power base is fracturing over the "shared burden" mantra. She now appears to have 23 willing to vote against the 440B Euro EFSF fund expansion. Her government could fall. The vote is scheduled for Sept. 7 and the Bundesbank has voiced stern opposition to bond purchases.
Der Spiegal has obtained a "draft document" from the political party CSU that reads in part: "An unlimited transfer union and pooling of debts for any length of time would imply a shared financial government and decisively change the character of a European Confederation of States." State bankruptcy and EU expulsion are discussed. The EU is very close to failing.
So, why the positive opening this morning? The US data will highlight a 3 dissent FOMC meeting and the NFP report. Irene will linger on the work environment into the holiday. Perhaps, the ecstasy dropping and glo-stick wearing euphoria of Burning Man has spilled across the economic landscape from the Nevada desert. The annual post-apocalyptic, anti-consumption, "de-commodification" idea fest is in full swing. So far, no sign of Angela. Nothing ever comes out of it but Burning Man's "importance" has grown every year. Lose the glo-sticks and you've got the Euro Zone. The fun culminates with someone big getting fried in an elaborate fashion.

Insert Weather Metaphor Here

The well advertised poor growth performance should kick off a Friday of ho humming. The Fed Chairman's mountain missive won't be a summer blockbuster. After spending 2 months on debts and deficits, the Monetary Master may toss a few huzzas back to fiscal policy.
The NAPM reports next week, always our favorite data points, will be huge. Sub-50 headlines could solidify the public's view that government has run out of bullets. The European situation continues to deteriorate with no Euro-bathing Buffett in sight to cough up capital. Every weak data point will be met with meltdown hyperbole.
GDP, Ben, Europe and the ISMs; the path of the storm can be tracked. This one is gonna leave a mark.

Fat Man in the Bathtub

Jaunita, my sweet Jaunita, what are you up to?

In the pantheon of bad visual images, we learned today that Warren Buffett takes baths. The amount of apoplectic ranting that transpired in the market before Warren's feet hit the mat was astonishing. We do know this, Mr. Buffett does not follow Mercury Retrograde or he'd of held off for another day. Coming on the heels of sad news on Steve Jobs' health, the beast that is the nano second capital market is on a rampage.

The truth is everybody needs to chill out in the tub a bit. The voices at the extreme ends of the spectrum continue to dominate the debate. We remain firmly in the camp that does not elevate blood pressure levels. Low to slow growth with plenty of market gyrations. That's about all a monetary regime in a debt depressed economy can generate. The political farce of the debt ceiling put us in "crisis fatigue" mode. Now the hurricane. I wonder if Warren knows the next line Lowell George wrote? "I hear ya moan, I hear ya moan."


The recent Bond-a-Palooza has been a classic growth scare. As equity values plummeted, T spreads to Junk have moved out. Investors are shunning credit risk, opting for duration risk and relying on the Fed to neutralize interest rate risk. So what about the Fed?
There is a vocal contingent of pundits calling for the Fed to either increase the size of its balance sheet, reinvest maturing notes in longer term notes, or both. The Fed has moved up the credit structure over time. The market has moved long term yields down since the FOMC anchored the front end. Why would the Fed add duration risk to its portfolio? Efficacy would need the Fed to go out the credit stack in QE not the term structure. We still see quantitative easing procedures as the most misunderstood policy tool. Analysts continue to confuse a few comments on stocks as the Fed "targeting" asset prices.
We advise watching the T/HY spread into and out of the Jackson Hole con fab. The context of any compression should be interesting. Bottom line, there are 3 risks to owning a note. They don't go away at zero, even permanent zero.