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Why Even Talk of Tightening Could Be Fatal


Repeat after us: There is zero chance the Fed is going to tighten…zero chance…zero chance…zero chance.  We’ve made this point so often here that it is has practically become a mantra at Rick’s Picks.  It has also been amplified, refracted and explicated – though not hotly debated – in our forum, where there are apparently few who expect any change in Fed policy. As how could there be?  For even the slightest hint that easing is about to taper off, let alone end, would bring on the Second Great Depression faster than you can say “Hooverville!” The prospect of hard times might have superficial appeal, since the legacy of the 1930s with respect to art, architecture, cinema, public works, automobiles and other monuments to creativity and human endeavor is quite impressive. But the downside is that the illusion of prosperity would be gone, and with it much false wealth that could never withstand the discipline of unrigged markets.  Also gone – overnight – would be the global banking system, buttressed as it is by a nearly quadrillion dollar edifice of hyper-leveraged derivatives.  Subject that sum to even a few more basis points of vig and you’re talking about trillions of dollars that would have to be coughed up in real money. Fat chance.

The foregoing is in response to a CNBC story out Tuesday evening under the headline Bernanke Expected to Deliver Dovish Message.  This is about as dog-bites-man as news gets – a space-filler intended to pump up the press-release version: Bernanke will testify before Congress today.  Here’s the opening paragraph:  “Federal Reserve Chairman Ben Bernanke is expected to maintain his dovish tone when he speaks to Congress Wednesday, and he is likely to dispel any notion that the Fed is ready to cut back on its easing policy.”  What puzzles us is the matter of whether such a notion even exists – not just on Capitol Hill, but in editorial rooms where stories like this originate. Of course, political calculations will naturally be biased toward easing until the cows come home. But there are also economic factors to be considered, such as: Won’t all of this easing eventually lead to really bad inflation?  This fear is misplaced as far as we’re concerned. More likely in our view is that there will be no “process” of inflation to reckon with, but rather a hyperinflation that comes on so swiftly as to steamroller whatever puny remedies might be tried.  In the meantime, deflation will continue to rule the global economy, since, as Margaret Thatcher famously warned, the statists have in fact finally run out of other people’s money.

While we await the global economy’s all but inevitable collapse, one thing we absolutely need not fear is that the Fed will stop easing.  And if the central bank should make the serious mistake of trying to cut back slowly on monthly bond purchases that currently total $85 billion, be prepared for the markets to reject the experiment with such violence that even the likes of CNBC will finally understand that tightening, or even merely talking about it, will by then have become quite impossible.

Please do not ask trading questions!

  • John May 30, 2013, 8:22 am

    Did I throw in Europe? Sorry, of course doesn’t belong in this group.

  • John May 30, 2013, 8:19 am

    Thanks all for your comments. Could someone with macro knowledge please have a shot at conjecturing how the dominoes would fall. Assuming a Japanese crisis, flight to USA bond safety seems plausible. While this was going on I wonder what would be happening in other Asian countries we haven’t mentioned, as well as Australia, Canada and Europe. Would their lower debt ratios cushion them enough or would their export-driven economies be crushed anyway by a global slowdown?

  • The Federal Farmer May 23, 2013, 3:48 am

    All of what you say is true…..but you say nothing about what can be done. All the while, the populace will do nothing but slip under the waves of complacency into the dark sleep.

  • gary leibowitz May 23, 2013, 2:34 am

    I agree that the end result will in all likelihood result in an economic mess. I will remind you that most everyone was sure the dollar would be devalued and hyperinflation result. If I have overstated or misrepresented the talking points I apologize. I bring this up because no one thought we would still have very low interest rate, a consumer muddling along, a stronger dollar, housing prices recovering, upward bias and steady employment growth, higher government revenues, and signs of commodity deflation. All this 5 years later? What do you suppose the odds makers would give the QE program working 5 years out? One in ten? Perhaps one in one hundred is more like it. Everyone assumed they understood what causes inflation yet this experiment proves those models wrong.

    Even the most Pollyanna mega investor Buffett scratches his head when considering how this all play out. I agree with all that was written. It is a long shot that it works. When confronted with such a crisis should Uncle Ben shut down his mental capabilities and concede on an emotional level that all is lost? My anger has always been that we pretended for decades there wasn’t a ten thousand pound gorilla right in front of our eyes. I find it amazing that no one in any political office with any clout ever brought up the mortgage instability, or any of the other concerns.

    Must sadly agree that we will not be able to slowly draw down the QE program as the workforce improves and spending starts accelerating. The question is what will change the policy and when this all goes south? Most are placing there bets for it to happen this year. I for now defer that time to a much later date. I wouldn’t assume the FED has complete control over when they start the cutback. In the very unlikely event of a heated economy they would have zero choice.

    • gary leibowitz May 23, 2013, 2:49 am

      BTW, Bill Gross, and a few other commentators I listened to on Bloomberg’s, stated that Ben’s speech was suggestive of an easing in a few months. If true, given the rather steep stock moves of late, suggest a top of some sort is coming. The experiment could be tested sooner than anyone thinks.


    • Redwilldanaher May 23, 2013, 4:09 am

      Clueless. Many people pointed to mortgage instability. It was a dc/bankster racket from the git go. Manchurian candidate McCain raised the issue notably.

    • mario cavolo May 23, 2013, 8:07 am

      Hi Gary,

      Skipping Keynesian economics and the Fed related issues, I’m thinking

      “Expansion is what causes inflation; they go hand in hand.”

      America expanded from the 50’s through 90’s and beyond, inflation in step along the way. Homes were $30k, now they’re $200,000, cars were $3k now theyre $20k, etc.

      China is experiencing the same thing all over again, long term multi-decades expanding economy with inflation of everything including wages right in step along with the expansion.

      I am incapable of comprehending economic theory/inflation/deflation/money printing correlations, as it seems most of us are being fooled!

      Cheers, Mario

  • Terry S May 22, 2013, 5:46 pm

    To paraphrase the kid in Matrix, there is no Recovery .

    • VegasBob May 22, 2013, 9:22 pm

      There never has been a recovery – the people of this country get a daily dose of lies, fraud, deception and statistical manipulation, and they lap it up like kittens at a bowl of milk.

  • C.C. May 22, 2013, 4:53 pm

    “The prospect of hard times might have superficial appeal, since the legacy of the 1930s with respect to art, architecture, cinema, public works, automobiles and other monuments to creativity and human endeavor is quite impressive. But the downside is that the illusion of prosperity would be gone, and with it much false wealth that could never withstand the discipline of unrigged markets.”

    Interesting statement – and true. It leaves out however, one ~small~ detail…

    We don’t have the society today that existed then. The temperament. The morals. The ethics. That is not to say those attributes forged out of difficulty are gone, but they are in the Minority now, where as before they were near universal in America. Imagine – if you can, the societal ramifications of an economic collapse – inflationary or deflationary, today. The mind spins at the possibilities.

  • John Jay May 22, 2013, 2:32 pm

    They might pull it off if they can get enough scared money forced into our Treasury market from South America, Europe, and Japan.
    Maybe even from the MENA if a big war erupts there and the KSA goes down.
    Then the Fed can unload their paper to foreigners.
    We have sowed so much chaos around the world, I hope that Flight to Safety here is their new plan A.
    Plan B is keep printing and hope for the best.
    We are completely at their mercy now, so I hope they can keep this farce going.

    Argentina is hoarding 1 out of every 15 cash US Dollars in the world. So we still look good to lots of South Americans.
    Link: http://tinyurl.com/osmdoyg

    They can probably get that Immigration bill passed in the Senate, but hopefully it can be killed in the House.
    I hope they kill it, it effectively makes Mexico the 51st State at our expense.
    With 854 pages you know it is designed to screw us once again.
    All we can do is try to survive in a world gone mad.

    • Cam Fitzgerald May 22, 2013, 9:24 pm

      Good point, Jay. They may indeed just pull it off. The last act is when failure looms on the home front that someone else has to take the dive first. By comparison therefore you can come out smelling like roses. It is my belief that Japan is going to be the fall man (as required) but we should not be holding our breath awaiting soft landings for China’s massive credit bubble to unwind either. Whatever we think is coming is probably misguided and misdirected anyway. I suspect there will be deeper consequences for the Eastern and Asian economies in the coming years that give a surprise lift to the reserve currency. Is it not already baked in the cake? The narrative surrounding China’s percolating troubles grows louder and more convincing by the day. Are there adequate words to convey the pain of real financial loss to people who have never experienced a bursting housing bubble in living memory nor suffered through a Western style recession in the absence of a social safety net? By comparison to parts of Asia, it is truly sunshine and roses over here

    • mario cavolo May 23, 2013, 8:00 am

      Hey Guys,

      China’s current weak areas are:

      Overbuilt commercial retail and office space in its major secondary cities, where a lot of new space has just come online, not Shanghai/Beijing/Guangzhou

      High debt loads/threat of municipal level defaults, pretty much the same state of affairs as the U.S. in this regard. (but in China supported in the dark by massive amounts of hidden cash)

      Slowing of manufacturing sector, some industries doing very, very well, while others really hitting the wall.

      On the plus side:

      Housing not a problem at current levels, in fact still rising even in the face of various govt measures to curb rising. Isolated ultra-high priced markets may take a tumble but broad lower/middle class pricing is very steady in the $80 to $200/sq ft range. The recent greater implementation of the 5 year 20% capital gains tax actually caused property prices in Shanghai to go up, not down. Go figure…

      Domestic consumer spending – no problem at all, even stronger than officially reported 12.8% rise…

      Domestic inflation – still rising and will continue to, along with wages, cost of doing business, cost of govt services, healthcare. Keep in mind, however, that much of this very high inflation is from very low price levels, don’t think like a Westerner, eg. an MRI now costs closer to $200, rather than $100, an ultrasound now costs $10 instead of $5, a car wash or haircut now costs $3 rather than $1.50., streetside dumplings now cost 5rmb instead of 3rmb, baby formula $20 to $30 rather than $10 to $2o, etc. That is very high consumer inflation for the lower income strata to bear.

      Cheers, Mario

  • redwilldanaher May 22, 2013, 2:26 pm

    Exactly! Nice piece Rick.

    Talk of tightening is tantamount to pulling back the curtain and seeing a flustered Frank Morgan.

  • bc May 22, 2013, 6:12 am

    I’m thinking the end game will be very Latin America like. First government tax revenues will collapse as the real economy grinds to a halt Atlas Shrugged style with productive enterprise disappearing at an accelerating pace. To compensate the state and central govt’s will deficit spend with the central bank buying evermore of the bad paper emissions with printed money. The rate of printing will be breathtaking as will the loss of purchasing power in the dollar. Hyperinflation indeed is the inevitable end game because the requisite restructuring of private sector debt can apparently happen no other way. Stupid? You bet. Just ask Argentina.

  • wayne siggard May 22, 2013, 5:35 am

    Sure the QE could end. All it would take is for the Republican house to refuse to raise the debt limit. LOL. The invertebrate members of the GOP will slither all over the hill with soporific soliloquies about saving the Republic from irredeemable debt before caving once again when Obama says “boo”.
    The cost would be huge enough to make the Great Depression look like a picnic, but that will look like a picnic if we don’t take our medicine now.
    The only people profiting from the stock market are the banksters and the 1%. The only people profiting from the “housing rebound” are the hedge funds and the banks by selling their bogus paper to the Fed.
    With the successive scandals erupting, with no consequence to anyone, the Immigration Bill is being fast-tracked. They just passed an amendment allowing all immigrants to apply for food stamps and welfare benefits as soon as they are “legal”; i.e. as soon as the bill is passed. All the illegals will be entitled to the earned income tax credit.
    There is no money. It’s gone, yet the gubmint keeps borrowing more to buy votes. Margaret Thatcher was right. She just didn’t count on fools lending to other fools to keep the merry-go-round going. Oh, sorry, the only fools buying Treasuries are those brilliant managers managing the retirement funds for the hoi polloi. The big boys wouldn’t touch it for the world unless it’s for overnight parking. Who was it who got advanced warning in Cyprus? The free money from the Fed will never be repaid by the big boys. I know I didn’t get any of it, did you?
    Remember the scene in “The Pianist” where he had to sell the piano to eat? I hope you have a lot of pianos.

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