Inside Janet Yellen’s Brain at 4 a.m. (Part II)

Submitted by William Bonner, Chairman – Bonner & Partners

Master of the Universe

GUALFIN, Argentina – According to several headlines, the U.S. stock market rose on Tuesday “ahead of Fed.” The Dow was up 229 points – or 1.4% – for the session.

And so, we return to poor Janet Yellen. Tomorrow, much of the world turns its lonely eyes to the Fed and its chieftain. The Fed has as much as promised to make the blind see and the lame walk. It claims that it – and it alone – is capable of improving the U.S. economy and, by extension, the world economy.

People will earn more money. They will live better. And they will have less to fear from financial calamities, such as those that happened before the Fed was set up in 1913.

In the popular mind – if there is such a thing – it is further believed that the Fed “won’t allow” a major bear market, because “it would be bad for the economy.” The Fed rules the entire universe of commerce, finance, and investment.

yellen-fed-580Never has a move in administered rates by a few basis points exercised people as much as this time around. Thousands of pages must have been filled with exhortations by assorted armchair planners as to “what the Fed should do” over the past few weeks. The usual suspects were pleading for more easy money.

Photo credit: Pete Marovich / Bloomberg

DJIAOver the past two days the DJIA has actually broken out of its triangle to the upside – normally a short term positive signal, but it remains to be seen how the market reacts to the FOMC decision – via STockCharts, click to enlarge.

Janet Yellen rules the Fed. But who rules Janet Yellen? Yes, the weight of extravagant claims and preposterous promises now falls on one woman: Janet Louise Yellen of Brooklyn, New York.

During working hours, she holds her head up and talks the mumbo jumbo of a normal, confused economist. But late at night, after tossing and turning in bed, her thoughts must focus more clearly. In moments of pure, enlightened terror, she must see the impossible position she has been put in.

“How am I supposed to know at what price credit should change hands? Of course, it is impossible,” she must think.

“Markets, not bureaucrats, set prices. Try to do it any other way and you always end up with a mess.

“And yet, here I am. I have a responsibility. I am head of the world’s largest banking cartel. I am charged – by law – to do four things.

“At least this is what the Fed’s website tells me…

“One, conduct the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.

“Two, supervise and regulate banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.

“Three, maintain the stability of the financial system and contain systemic risk that may arise in financial markets.

“Four, provide certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and play a major role in operating and overseeing the nation’s payments systems.

Fed-rate-decision-668x501And this is how it’s done in practice …

Cartoon by Danziger

ZIRP for Zip?

“I shouldn’t ask questions. I should just do the job.

“Full employment? Yes… I think we’re on the right track.

“Stable prices? Where did that come from? I didn’t know that was in there. No question – we nailed that one. Prices are more stable than we wanted.

“But we were aiming for 2% inflation. Well, how do you like that, we hit that target without even trying?

“But if the economy is as healthy as I say it is, it isn’t going to be bothered by a quarter-point rate hike. And if it isn’t as healthy… and the rate hike throws it into a tizzy… then all those seven long years of ZIRP did zip for the economy and rates may as well be raised anyway, no?” (Janet smiles; she is pleased with her turn of phrase.)

“Wait… maybe the employment picture isn’t as good as I’ve been told. There’s that former assistant of mine, Andy Levin, shooting off his mouth at Bloomberg.

“He says the U.S. is probably about two years away from achieving full employment… and that millions of Americans working part time would take full-time employment if they could get it. And many others out of the labor market might be induced back in if they felt they had a chance at a job.

“And there are all these clowns on TV explaining why I should or why I shouldn’t raise rates… or why I will or why I won’t.

hawkishLeaving the birds guessing.

Cartoon by B. Rich

“One tells me the unemployment rate is not as good as it sounds. Another says China is headed for a serious depression. Another worries that world trade is slowing.

“One says speed up. Another says slow down. They think I’ve got some kind of machine here where all I have to do is to stomp on the accelerator and the economy will race ahead. But if I had that, I would’ve pushed the pedal to the metal a long time ago. It doesn’t work that way…

The Biggest Mess in History

“And… oh no… maybe the whole idea is wrong…

“Maybe I didn’t read the job description closely enough. I mean, maybe you don’t get stability, full employment, safety, and so forth by pulling on these levers and turning these knobs.

“Maybe being a central banker is not like being a car mechanic. Maybe it’s more like being a judge.

“Judges don’t have to come up with new tools, like quantitative easing. They’re not supposed to use unconventional methods. They’re not expected to improve the world, for Pete’s sake.

“Judges are just supposed to apply the law and come to the same judgment tomorrow that they made yesterday. The key feature of a judge’s role is a lack of innovation. You murder someone… the judge throws the book at you. Easy-peasy.

judge jobThe moment the book lands

Illustration by Dale Messick

“Murder is murder every day of the year… Saturdays and Sundays included. It doesn’t matter what the unemployment rate is.”

“Judge’s don’t have the world watching… anticipating their next move; their next move is supposed to be just like their last move. And they don’t have to care what happens after they render judgment. Their job is simply to render the correct judgment… every time… just like the last time.”

“I bet judges sleep better at night.”

“Maybe that’s the way central banking is supposed to work, too. It’s not for me to worry about the jokers who have gambled on low rates. What do I care if their stocks go down?”

“But wait… if they go down too much… too fast… we could have… hmmm… a situation on our hands. And it could develop into a very big mess… the biggest mess in world history.”

“Oh my… is it morning yet?”


Image via

Yellen Just Doesn’t Factor

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

When I wrote on Friday that I was encouraged for the first time in years over the combined rise of Trump and Sanders I meant nothing by way of suggesting either as an actual candidate or what they might do should they pull it out. If anything, I implied that the political situation might have to follow the economy; that it should get a whole lot worse before it gets much better.

The point was not so much about the candidates themselves but the palpable angst that they loosely but clearly represent. It is a growing bipartisan rejection of the status quo as it relates to the economy. For years now, the political class has been lying about the state of the recovery because economists have so fortified their temple. Monetary policy and fiscal “stimulus” are all that there is and nothing else except that which retains the political hierarchy remains. It joins Tea Party and socialists alike, to tell Janet Yellen and/or Wall Street “enough.” The uniting factor is an as-yet amorphous or ephemeral sense that “something” is wrong and that those that continue to press on as if there weren’t need to be removed.

Sanders’ entire script reads as Occupy Wall Street. Therefore, his is the right target if the wrong solutions.

He [Sanders] has called for new spending that (for now!) totals $18 trillion over the next 10 years. This massive sum is to be spent, among other things, on single-payer health care, an expansion of Social Security and a massive taxpayer-funded infrastructure program.
Under his plan, the federal government would directly control 30 percent of spending in the economy, compared to the 20 percent we have seen in recent decades. For a comparison, the European Union’s “federal” budget equals about 1 percent of the economy of its member states.

To “pay” for his redistribution, Sanders apparently looks at the usual and massive tax hikes. Over a ten-year period, AEI tells us, they would amount to $6.5 trillion in new “revenue” taking no account on the non-assumed economic damage. That is 13 times the tax increase of the already-coming Obamacare style. Continue reading

Could the Free Market Improve on This?

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Poverty Not Dented

A friend sent us a link to an article at Marketwatch, which bemoans that in spite of an improved labor market, “poverty has been barely dented in the US”. Of course, people living in some third world hell-hole would be quite surprised what kind of incomes are considered to constitute poverty in the US, but from a developed world perspective these thresholds do seem to make sense to us:

“The U.S. poverty rate was unchanged at 14.8% in 2014, according to a release today from the Census Bureau. This was the fourth consecutive year that the poverty rate was not statistically different from the previous year.

The lack of change shows that the progress in the U.S. job market–in 2014 the economy added 2.6 million jobs, the most in more than a decade–have remained insufficient to lift the fortunes of the nearly 47 million people living in poverty.

The official definition of poverty varies depending on the size, age and composition of the family. For a couple with no children under age 65, the threshold for income below which they are considered in poverty is $15,853. For a couple with two children, the threshold is $24,008.

labor and povertyA near record number of people remain in poverty according to the official definition – click to enlarge. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

The Fed Gives Growth a Chance (NY Times ed.)
Fed Delay Looks Like 2013 All Over Again-Rate Hike in December? (Bloomberg)
Fed Rate Decision Roils Emerging-Market Currencies (WSJ)
It’s a New World: How China Growth Concerns Kept the Fed on Hold (Bloomberg)
Europe Lacks Strategy to Tackle Crisis, but Refugees March On (NY Times)
Losing Control Of Refugees, Croatia Closes Serbia Border Crossings (Reuters)
Croatia’s Resources Stretched as Thousands of Refugees Arrive (Bloomberg)
OPEC Assumes Oil Price Will Recover Gradually to $80 in 2020 (Bloomberg)
Defaults Mount in Beleaguered US Energy Industry (WSJ)
Central Banks’ Lesson: Easy Money Alone Isn’t a Growth Salve (WSJ)
China Outflows Said To Surpass A Staggering $300 Billion In Just 75 Days (ZH)
China’s Top Financial Firms Get Green Light for $3 Billion IPOs (WSJ)
Here’s Why China Could Drag The US Into Recession (Fortune)
Primary Dealers Rigged Treasury Auctions, Investor Lawsuit Says (Bloomberg)
Bitcoin Is Officially a Commodity, According to US Regulator (Bloomberg)
Beppe Grillo Gets One Year Jail Sentence for “Defamation” (Tenebrarum)
Scorching Year Continues With the Hottest Summer on Record (Bloomberg)