Thursday, March 20, 2014


The common story is that it was a rookie mistake.  The Chair of the Federal reserve announced yesterday that tightening might begin after the end of QE but not for a considerable time…and then defined "considerable" a six month.  Panic all around.  Why? Well everybody had decided that QE would be ended this fall so six month meant 1st quarter 2015 which was quicker than anyone thought.  Down go equities, up goes yields.  But wait, did she really mean that?  Probably not, just a rookie mistake in being so specific.  Up go equities, down go…or do they?

The answer is who cares.  What Ms. Yellen did yesterday about which no one is speaking is lay bare the entire nonsense of this bank and its operations of the past 10 years.  Remembering the targeting of the employment rate to tightening?  She scrapped it.  Now everyone knows that the employment figures are crap; you couldn't have gotten a bet before the 2012 that the unemployment rate wouldn't not fall below 7%.  Everyone knew it would.  Everyone knows today that the unemployment rate isn't 6.7% or whatever the hell it is.  Nobody cares.  And when nobody cares it's effect is meaningless.  But when the Fed targets monetary policy, which does have an effect in the real world to a nonsensical target, then people care, especially FOMC who winds up with it's butt in a crack and nasty options on how to try to get it out.

So what Janet told the world yesterday--not that she wanted to mind you--was that they hadn't a clue as to forward guidance and were just going to wing it.  THAT was the rookie mistake.  She told what in fact is the truth.

The guys at risk figured this out.  The yield curve flattened out to the Long Bond which never moved.  The risk is short term and everybody knows it.  The 10 year gapped out from 2.62% two days ago to 2.77% as I write, down from 2.83%.  What will come will come and hopefully, a lot of people will start preparing for it now which may mean leaving some profit on the table for the sake of better positioning  which will really not be a bad thing.

What I hope, however, is that the realization of what has occurred over the past 10-15 years will become obvious.  The Fed has been a disaster.  Aside from creating one liquidity bubble after another, upon the abandonment of any cogent fiscal or economic policy in Washington, the Fed has, without hesitation lept into their so-called second mandate and tried to run everything, and most of it in the midst of a financial crisis--that they missed--that lingers until today.  This economy stinks; just like the employment rate it is fooling no one.  and what have wee see from the Fed.  Well, first, in order to stem the rout, they pour liquidity into the banks up promptly turn around and put it right back into the Fed.  Why?  Well why not?  The Fed is paying interest on those "free reserves."  Why the hell are you paying interest.  Huuuum, good question.  If you have a positive carry with absolutely no risk during a time when no one is really looking for earning gains, it's a no-brainer.

But haven't things changed?  Sure, but the Fed was way out front in crafting that catastrophe known as Dodd/Frank, whose primary result was to discourage risk while at the same time the Fed and every other half-assed regulator with a pen was formulating new regulations many of which were not understood or made no sense in the first place.  Said the banker, "You want me to take more risk in this environment?"  I leave out the assault on individual institutions by The Leader's Justice Department and Attorneys General from God knows how many states who found standing probably on the basis of having written a check at one point in their lives.  You wonder why the economy is sluggish and credit is tough?  Then again, you can always go to the shadow banking system.  Now there's a testing risk management idea.

The fact is this country would be far better off…as would the Fed…without the dual mandate.  After yesterday, I don't see how one can pretend to argue against this as the head of the institution just told you she has no idea what the future is going to bring.  I mean, like, you gotta have a plan, dude, like go with the flow doesn't quite make it.  Or does it?  Maybe she was sending a message.  Or maybe she found reality and just didn't recognize it.  Or maybe it was all of the above but she's just going to carry on because……because she likes it that way.   Makes one long for the days of Mr. Greenspan when everything was crystal clear, doesn't it?

Got to see the quacks tomorrow.  They want to poke and prod, so this ends the week.  Big road trip next week.  Tell you all about it on Monday.  The Ohio State University lost to Dayton in the first round.  Talk about financial disasters!  75% of the pools are blown up.

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