Why the Fed's Policy Actions Are Not Working

“Trickle-down theory - the less than elegant metaphor that if one feeds the horse enough oats, some will pass through to the road for the sparrows.”

John Kenneth Galbraith

As I said earlier today in a reaction to the FOMC announcement:

"This is all a bit moot really, because except for the betting parlors it doesn't matter whether the Fed raises 25 basis points or not. You can print money and give it to the banking system and the very wealthy for their personal gambling and asset acquisitions activities all day long.

The system is broken, the real product of the nation has been hijacked by financialization, the international monetary exchange is in chaos, and almost all of the gains are going to the top.

And the Fed and the government are doing virtually nothing to change this."

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be an sustainable recovery.

And keep the financial system on life support while the rest of the economy languishes, the poor suffer, and the middle class deteriorates is not coherent, except for a narrow band of beneficiaries.

Let us be reminded that the Fed is also a primary regulator of the financial system as well as an interest rate joystick operator.

And the mainstream media and the politicians wonder why the public is not doing what they expect.

This chart below is from Bloomberg News, The Richest Americans Are Winning the Economic Recovery.

"U.S. Census Bureau data out Wednesday underscore just how lousy the recovery has been if you aren't rich.
Looking at eight groups of household income selected by Census, only those whose incomes are already high to begin with have seen improvement since 2006, the last full year of expansion before the recession. Households at the 95th and 90th percentiles had larger earnings through 2014, the latest year for which data are available.

Income for all others was below 2006 levels, indicating they're still clawing their way out of the hole caused by the deepest recession in the post-World War II era."

And this result, after eight years of some of the biggest expansion of a central bank balance sheet in US history!

NAV Premiums of Precious Metal Trusts and Funds

If you are curious about the additional data on the top right of the spreadsheet, this is just the way in which I am tracking the market reaction to the Sprott offer for an exchange of PHYS for GTU.

As you can see the Sprott offer is almost spot on to a NAV/NAV calculation. There is a slight premium on Price/Price because of the greater discounting of GTU in its market price.

On this I am not accounting for any risks or expenses, merely the nominal market reaction.

The gold/silver ratio remains historically high at 73ish. I suspect that this is because the metals are enjoying a 'flight to safety' more than 'inflation being driven by a robust economy.' But it could be something else.

Fed Does Nothing, Lacker Dissents - And the Band Played On

All is well in the US. The rest of the world, however, is a problem.

Explication to follow with Janet Yellen's press conference.

In their separate economic projections statement they appear to have lowered their inflation expectations.

Given their track record on forecasting I think this is more of a Rorschach test than a reliable guide to the future.

We're in the new normal of high employment, low wages, sluggish growth, and slack inflation.

And we're are doing just fine.   Depending on how you define 'we.'

Even though the Bloombergians were later laughing at this, I tend to lean towards Ray Dalio's prognosis.

“I don’t care whether they raise 25 basis points,” Dalio said Wednesday in an interview with Tom Keene and Michael McKee that was broadcast on Bloomberg radio and television. “What scares me, or what worries me, is what the next downturn in the economy looks like, with asset prices where they are and a lesser ability of central banks to ease monetary policy.”

He predicted that returns across asset classes over the next decade will only average 3 percent or 4 percent. Narrower spreads will make it much harder for asset purchases to have a big effect on the market, he said."

This is all a bit moot really, because except for the betting parlors it doesn't matter whether the Fed raises 25 basis points or not.  You can print money and give it to the banking system all day long.

The system is broken, the real product of the nation has been hijacked by financialization, the international monetary exchange is in chaos, and almost all of the gains are going to the top. And the Fed and the government are doing virtually nothing to change this.

And the band played on.

Release Date: September 17, 2015

For immediate release

Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.

Timely Caution Is Advisable With Your Gold Holdings

In the light of how the MF Global debacle was sorted out by the courts, and based on a growing body of circumstantial evidence and market indicators, if you are holding your gold bullion 'insurance' in the form of unallocated or opaque holdings, or a hypothecated paper claim in one of the major exchange trading warehouses, you may wish to take measures to safeguard your ownership claims without much delay.

I wrote something overnight, On the LBMA and Their Unallocated Holdings, in which I lay out the case, based on facts and some presumably informed speculation from Jim Rickards,  that there is a serious physical shortfall in gold bullion developing that may not resolve as readily as it did in 1999, when the Bank of  England presumably bailed out the trading houses.

Commodity backwardation is not all that unusual.  But it is somewhat unusual in the precious metals. And in combination with a few other items, it seems worthy of note and some preventative measures.

Koos Jansen notes that gold is now in backwardation in both London and New York.

"Not often in financial markets is the future price of gold is lower than the spot price (live), but lately we’ve witnessed such an event in both the New York and London gold market. This is called backwardation, the opposite of contango.

What causes backwardation and will it increase the price of gold? In my opinion there are two possible scenarios: the market expects the gold price to fall in the future, or there is scarcity now."

You may read the entire article here.

And we now hear from Ronan Manly that staff in the central banks have been restricted from discussing their gold holdings.

Please note that I am not suggesting that you should rush out and take large long positions in gold with the maximum leverage, pile into penny miners hoping for a 'home run'.

I suppose that quite a few will miss this caution since it is not heralded with blaring headlines of imminent doom, but perhaps those who need to hear it will do so.  And I am sure that the apologists and the paperati will find their usual ways to dismiss all this, and urge us to ignore all these odd doings in the warehouses.  Such are the times.

And I am not ruling out a much larger development behind the scenes with regard to the international monetary regime, that is 'leaking out' from official sources to banking cronies who may act on it ahead of time.  But I have no strong indications of that.   The IMF seems incapable of resolving the developing monetary crisis because of Anglo-American intransigence.

This is a purely circumstantial case.  As was the case that Harry Markopolos presented for years on Bernie Madoff.  And it may be wrong, or it may be right and vastly understated.  But I think that we have means, motive, and opportunity, and so one may advisably act with caution.   And so I have discharged my conscience in not remaining silent while potential trouble looms and the denizens of the markets take care of themselves.  It is not so easy a decision to make when you do not have sound evidence because of secrecy and misinformation.  And I am sure many will take this, use it as their own, and wrap this in florid headlines and dire predictions of doom.

I suspect at this point that a price correction is still possible as a remedy, but I am not so optimistic to rule out a greater effort to cover it all up that will make things exponentially worse, in the manner of the London Whale and MF Global and LTCM and so many examples of reckless hubris.

There is quite a bit of official interest in bailing out these wanton rich boys from their gambling debts and assorted scrapes, as Sir Eddie George of the Bank of England noted in 1999.  And the central banks may rise to the occasion and lease out the people's gold on the cheap to get them out of this one as well.  And all under the radar, hush hush.  Insiders never speak ill of insiders, or do anything to inhibit the kleptocracy.

"Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise."

Alan Greenspan, Congressional Testimony, July 24, 1998

The denouement of the New York-London Gold Pool is coming, but it may not be here yet. These things tend to drag on and on, wearing most everyone who suspects them out. Lots of people make claims about 'paper markets'. They paper the landscape with them. And if something happens, they will all claim to be the first. The point is to drill down and attempt to assemble the data against determined effort to distort and obfuscate and hide it.

There are people who make calls, and people who make money. I don't make 'calls.' I try to calculate odds, and then take some guidance from the probabilities. There are no sure things in this life, except that we will all meet the same end, and I believe will be called to account for our actions.

Timely caution is advisable, perhaps on a number of fronts.

"The August turbulence in global [equity] markets has produced significant shifts, including a 6.6% fall in equity prices. The currencies of emerging market countries have depreciated substantially against the G-4, while emerging market borrowing rates for sovereigns and corporates [bonds] have moved higher. Global oil prices have been whipsawed as have G-4 bond yields.

The speed and magnitude of these movements is reminiscent of past episodes in which financial crises emerged or the global economy slipped into recession. However, nothing appears to be breaking. Global activity indicators have, on balance, disappointed but remain consistent with a modest pickup in the pace of growth. Additionally, despite the turbulence in financial markets, there is no sign of unusual stress in short-term funding markets or of a credit crisis in any large Emerging Markets economies."

Bruce Kasman, Chief Economist, JP Morgan

So be of good cheer, nothing appears to be breaking, yet.