Thursday, April 28, 2011


I wanted to provide a video feed of yesterday's historic post FOMC meeting press conference.  This was a brief review of the FOMC decision and a question and answer session where the FOMC Chairman Ben Bernanke addressed the nation via a few questions from reporters.  Unfortunately there was not a real opportunity for meaningful follow up questions nor any real journalists that would actually press the Chairman about the destruction that he is causing.  Anyway, here is the video.  Below I've captured a few highlights that I've summarized and also pulled out a few notes and quotes from the exchange.

Bernanke Video

The first 13 minutes or so are his summary of the FOMC press release.  I think it is worth the time it takes to watch it.

  • "As long as we have low resource utilization we will have a low Fed Funds rate."   
  • GOATMUG TRANSLATION - (As long as the economy is sluggish and showing slack, our friends at the Fed will be more than happy to provide extra-ordinary measures to assist the economy).
  • "The Fed has a long term outlook for growth for the US economy at 2.5% to 2.8% with a long term unemployment rate of 5.2% to 5.8%." 
  • GOATMUG VIEW - Are you kidding me?  There is absolutely no way we will hit 5.8%!!!!
  • (6:40) Inflation from commodity pricing has increased significantly recently, BUT measures of underlying core inflation has only risen moderately.  Inflation remains subdued and long term inflation expectations remain stable.  (7:13)As increasing commodity prices moderate, inflation should decline."  (9:13)  If inflation is not passed through to consumers and households then inflation will remain tame.
  • GOATMUG THOUGHTS - I don't think there is enough space on blogspot for me to write about these amazing statements!  First of all, inflation from commodity prices have increased, but because we use a fake measure of core inflation that excludes energy and food, of course it has only risen moderately!  That too is about to change as we have seen annoucements from companies like Kimberly Clark and others that state they are raising prices.  Second, long term inflation expectations are not remaining stable unless of course you are looking at the bond market to suggest that things are great.  Many financial pros suggest that treasury rates have not exploded higher, therefore, inflation expectations remain in check.  I would counter that the FED is buying those treasuries and is obscuring the true price of those bonds.  Next, Bernanke says that commodity prices increases should moderate..... how?  Finally, if inflation is not passed through to consumers, inflation will stay low.  Well, since we are now seeing price increases flow through, don't you think that confounds the entire argument? 
After the briefing, Bernanke took a few questions from the stooges that were lined up.  Here are a few of those questions.

  • "First, the Federal Reserve believes in a strong dollar, just like Sec. of the Treasury Timothy Geithner.  Over the medium term we are trying to remain stable inflation.  We are also trying to get a stronger economy through maximum employment.  In our view if we do what is needed to achieve the dual mandate we will create fundamentals that support the dollar.  The dollar retains a high standing in the world.
  • GOATMUG RANT - Really?  Yes, there was a safe haven effect that caused the US Dollar to spike in 2008 and in 2010.  However have you noticed that since May 2010, the dollar has gotten crushed.  I haven't seen any of the policies that you highlight as successes that have influenced the direction of the dollar in a positive way.  In fact, the creation of QEII has been absolutely connected to the decline of the value of the dollar and the increase in "asset values".
  • “There’s not much the Fed can do about gas prices. After all the Fed can’t create more oil. We don’t control emerging markets. What we can do is try to keep higher gas prices from passing into other prices, creating a broader inflation. Our view is that gas prices will not continue to rise at the recent pace.”
  • GOATMUG DISCUSSION - Ok, remember that for once Bernanke says that the Fed can't do everything!  However, I think this is a subtle shift where Bernanke usually highlights how effective and powerful the Fed is at controlling everything in the financial world, but then suddenly becomes impotent when it comes to the price of actual hard assets.  I don't buy it.  This line of response essentially says that the emerging market economies are responsible for all the increased oil demand in the world and that this coupled with the unrest in the Middle East is causing gasoline prices to increase.  There is not one mention that it really is the relative cost of the gasoline that is killing people in the US due to the destruction of the US Dollar.  Not even a whiff of that here.  Finally, later we'll see that the Fed takes credit for the increases in asset prices, the problem is that we at the Goatmug Blog realized early in January that gasoline was an asset!  Therefore I suggested that it might be a worthwhile consideration to buy a whole bunch of UGA to get ahead of the crowd that might also see gasoline as an asset. (look to the very bottom of this long post).  So, indirectly and directly, we have Mr. Beranake to thank for our huge increase in asset prices!  Thank you FED!

  • The ending of QE II won't harm the economy because we have telegraphed the end of the policy and the market expects it.  Second, it is not the pace of ongoing purchase, but the size of the portfolio.  The amount of securities we hold will remain approximately constant.  The amount of monetary easing should remain constant.  Early in our exit process, it is very likely an early step will be to stop reinvesting securities that will be maturing.  This is a tightening.  We would do this based on economic outlook. 
  • GOATMUG REMARKS - So, what you are saying is that turning off QE won't impact the market. (What about what happened at the termination of QE 1?)  Secondly, although you won't buy more than the allotted $600 Billion in QEII and you say that you are terminating the program, you even suggest that you'll continue to buy securities as maturing ones roll off.  So, in other words, you are going to keep QE II going forever.  Ultimately when life support can be removed, you'll then start selling.  Hopefully the patient won't be dead when that happens.

  • The Fed took extraordinary measures to stabilize the economy.  We have created new ways to to change monetary policy.  The Fed has a dual mandate.  The Fed needs to worry about inflation.  The cost of future inflation on employment could be high.
  • GOATMUG RETORT - No, while the Fed talks about creating jobs as an indication that the economy is recovering, the FED doesn't have any ability to create jobs and the fact that it has taken this long for someone to realize it is just a sad commentary on how poor the main stream media is at actually providing quality analysis and a statement that Joe 6 Pack and Mom and Pop are doomed.  Notice the shift here.  The Fed's intent was to get asset prices higher to save the banks and now that they've done all they could, they want to exit stage left.  J6P thought he'd get a job out of it, but all he got was a foreclosure notice.

  • "The second round of securities purchases was effective.  We saw this first in financial markets.  We saw this in increases in stock prices, decreased spreads in credit markets.  We saw the same responses as we saw in QE 1.  We did get very significant easing.  You would expect from decades of financial experience that it would lead to improving economic conditions.    We didn't say this was going to be a panacea.  We never said that it would solve the enourmous jobs problem.
  • GOATMUG - So there it is.  The metric for the measurement of the impact of QE is if financial markets and asset prices (stocks) go higher.  This is no revelation for me as I've highlighted this stinking thinking for more than a year now, but it now seems that Bernanke has simply given up on the notion that alluding to a recovery in other parts of the economy matter (jobs, housing, manufacturing).  Clearly Bernanke has settled in to the thought process that simply stock price increases an indication of a job well done.  See, that was always the game.  The FED has always tried to ease to prop up the next bubble.  The only problem is that this bubble has been one that has been of great size (huge increase in asset prices over the last two years), and it has been so fast.  The last bubbles (housing and tech) took years to pull off and were like slow moving freight trains.  The resulting crash from this Fed bubble will be much more messy due to the size and speed at which it has been formed.  So, that is what is striking, I see Bernanke shrugging here and simply saying, "Well, we did what we could and stock prices rose, it's just too bad the jobs didn't materialize with it". 
  • "The problems are getting tougher due to inflation risk."
  • GOATMUG - Bernanke is saying, "That's it, NO MAS!"  In other words, they are trapped and he knows it.  Of course he doesn't come flat out and state that he created all of this inflation.  Of course he doesn't say that housing is going to implode even more.  Of course he doesn't say that he can't do anything about jobs.  He simply is saying, we're done, we can't do anything extra other thank keeping asset purchases at the same level.  See, if Bernanke does the Son of QE (III) we will see commodities go even more nuts and the US dollar simply collapse.  Recall, I've always stated that the US Dollar destruction was purposeful and choreographed like a dance.  A collapse is not the best form of art, so this is where we could see a skillful move on the part of the Fed to hit stock markets with a few blows (corrections) and move the dollar higher.  You can't just have the dollar fall through the floor.  Once there is a reprieve, we could see some sort of emergency stimulate program put in place again.
Let me wrap it up there. The press conference didn't tell us anything we didn't know, but give us a few hints as to the mindset of the Chairman.  This is important because what he says goes, the other Fed Governors are simply a distraction.  I'll just bullet point the key items.

*  Inflation is showing up, but somehow it will moderate.  (How?)
*  No more QE, except for the $600 Billion they have on and whatever else they decide to do later.  (A promise)
*  Jobs no longer are under control of the Fed, they can only indirectly create an environment where that happens. (Sorry)
Asset prices have increased, so that means the Fed did a good job.  (Bubble factories only know how to make bubbles).

*  The strong dollar is important to the FED.  (We believe in the Loch Ness Monster too).
*  The Fed didn't impact increasing gas prices (obviously it isn't an asset), that is the fault of emerging markets. (uh huh.)
*  The Fed is stuck.  They are at the end of the rope and they know that they are creating inflation.  (The dirge is playing).
It is telling to me that the Fed is winding things down.  The theme we've discussed all year is that stock markets could begin to fall in May which historically has been a very poor month.  Thanks for sticking with this post.  It is a bit weird in its structure, but I think that we can pull a few interesting tidbits from the remarks how the Chairman responded to the questions.

Since I mentioned it, I might as well make a comment about the on-going UGA trade.  Things have obviously gone very well in this trade since the original post on 1/17/2011 when UGA was trading at $40.00.  $14.00 in gains is nothing to sneeze at and I do think that it will continue to be a positive trade.  Having said that, it is nice never to give back hard fought gains.  Therefore I advocate putting a stop in around $53.00 (I'd do it 5 cents below) to ensure that you don't blow a great trade.  There was a gap up that took place around June of 2008 where UGA blew through $60, I have that as an upside target for this trade.  This is also a good way to trade this since I posted that article from where they suggest the best trade here is to sell on May 1 or May 15.  Either way, we can let the market just take us out around $53 or get us to the target.