Randy Woodward: 2013

Friday, December 27, 2013

It's sad to me the things which should applauded, end up ridiculed.

McDonald’s pulled the plug on an internal employee site that offered financial and life advice, due to what media was calling an “embarrassing gaffe”. The main example used was the one below. Read this, and tell me if I’m wrong. Is this not an extraordinary statement by a major world corporation that essentially says “we provide a service, not a way of life”? And sadly, such a rare example of a corporation wanting people to understand the “spirit” of the service they provide, is considered a “gaffe”. The media constantly talks about how the climbing stock markets only benefit the “1%”, and how the rest are being screwed. And yet, they turn around and attack a company for trying to provide wisdom because of what it may do to their stock price. Ironic no? Randy

"Fast foods are quick, reasonably priced, and readily available alternatives to home cooking. While convenient and economical for a busy lifestyle, fast foods are typically high in calories, fat, saturated fat, sugar, and salt and may put people at risk for becoming overweight."

Randy Woodward

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Tuesday, December 24, 2013

My favorite quote, and a great motivator to start a new year!

“Go back inside yourself and look: if you do not yet see yourself as beautiful, then do as the sculptor does with a statue he wants to make beautiful; he chisels away one part, and levels off another, makes one spot smooth and another clear, until he shows forth a beautiful face on the statue. Like him, remove what is superfluous, straighten what is crooked, clean up what is dark and make it bright, and never stop sculpting your own statue, until the godlike splendor of virtue shines forth to you...If you have become this, and see it, and become pure and alone with yourself, with nothing now preventing you from becoming one in this way, and have nothing extraneous mixed within yourself...if you see that this is what you have become, then you have become vision. Be confident in yourself: you have already ascended here and now, and no longer need someone to show you the way. Open your eyes and see.” (I 6, 9, 7-24) Plotinus

Randy Woodward

Wednesday, December 18, 2013

I'm not sure of the ramifications, but the Japanese Yen is getting crushed, as they wish, against the Dollar and the Euro.

· The Yen gaped down against the Dollar and the Euro seconds after Bernanke announced the beginning of taper.

· This is exactly what Japan has wanted, apparently to stimulate exports, even though they are creating massive food and energy inflation for their citizens.

· I don’t think it’s likely other exporting counties like China, South Korea, India, etc. are going to stand by idly on this issue.

· It’s all about “Currency Wars” and the fight for exports.

· Something to keep an eye on.

· Below is the Yen to Dollar, and then the Yen to Euro. 5yr lows on both.

Randy Woodward
Managing Director, Fixed Income Capital Markets

One Burton Hills Blvd, Ste 225, Nashville, TN 37205

( Toll-Free 800.764.7621

6 Mobile 615.969.2682

Randy.Woodward@RaymondJames.com

Perspectives - Ok! Now that all that excitement is done, let's consider the future of short term rates.

· The Fed has tapered QE $10bil, $5bil from treasuries, and $5bil from MBS. Now, the talk will be “taper pace”!

· Keep in mind, they’ll be adding another $75bil next month, which I believe will put their balance sheet over $4 trillion.

· Considering those numbers, $10bil doesn’t sound like so much.

· But for now, I’d like you to consider this. What time frame could we fathom for seeing the Fed “raise” short term rates?

o What needs to happen before they could be in a position to raise rates?

o First, they’ll have to taper this current QE to zero. How long will that take?

§ What if something goes wrong and they “pause”?

§ What if something goes really wrong and they take it back up?

§ FYI, as I write this, Bernanke said they do plan on a $10bil tapering pace going forward, as long as the data supports it.

o Second, we need to remember they are “reinvesting” all interest and principal cashflow off their $4tril holdings.

§ This is not an insignificant number. I believe it’s measured in tens of billions.

§ It would seem to me that this will need to come to an end before they start raising rates.

o Third, would you raise rates when you own $4+ trillion in bonds? I don’t think so.

§ If they were to raise rates BEFORE they shrank their balance sheet, they would have MASSIVE losses in their holdings.

§ That would seem to prevent them from SELLING any holdings, given they would be taking losses.

§ This alone, appears to be the most significant reason we won’t see higher fed funds rates anytime soon.

§ THUS, if they raised rates, they’ll handcuff themselves on shrinking their balance sheet to strictly principal cashflows.

· With all that said, how long do you think it will take the Fed to accomplish all that? I think a VERY LONG TIME!

· How about other metrics?

o Well, just now Bernanke said rates will remain low “well past” the time unemployment of 6.5% or less is reached.

o Remember, Bernanke and Yellen has OFTEN mentioned that there will be a “quality” consideration on the level of unemployment as well.

o They both have pointed to the participation rate. I believe they will ADD this metric to their talking points in the future.

o He’s also said in his Nov. 19^th speech that even if 2% inflation is reached, it’s like they’ll allow that to go “some degree” over this level before raising rates.

o But what if we had run away inflation? Won’t happen. The only way that can happen is if the private sector ramps up credit creation at the pace they did leading up to 2007. That’s simply not going to happen. And the fact that the Fed has now started tapering, that should also mitigate runaway inflation.

Consider all these things! Especially considering my comments on the ramifications to the Fed’s balance sheet and their likely desire to shrink their balance sheet, if they were to raise rates. Given EVERYTIHING that needs to happen, it would seem to me that it’s going to take a VERY long time to see the Fed raise rates.

Several market participants I respect say rates will be zerobound for 5 to 10 years. However, I believe they only say that because saying what they’d really like, 15 to 20 years, just sounds ridiculous. But I think that’s what they believe, and it’s what I believe. And so far, we’ve been right for 5 years.

Randy

Sticking my neck out - my final "taper" prediction - a $10bil cut to treasury purchases. A summary.

· Does Bernanke want to get taper started?

o He sure does. I explained at length when I summarized his Nov. 19^th speech.

o He made it VERY clear they are worried about the “efficacy and risks” associated with QE. That’s a strong admission.

o He essentially begged the markets to put more weight on forward guidance over continued QE.

o He called the selloff in bonds last time he tried to taper “neither welcome nor warranted”.

o That statement alone, demonstrates how serious they were about starting taper.

o If you read the speech, there is NO DOUBT he’s anxious to get it started.

· Why do I think they’ll taper today?

o Bernanke tried to taper in Sept. floating the idea in June. He obviously wants to get it started.

o The 10yr yield gaped up from about 2% to 3% very quickly on his floating the idea. Thus they decided not to.

o Taper-talk by the media and Federal Reserve presidents have increased over the past couple of weeks yet…

o This time, the 10yr has remained stable currently trading at 2.885%. They HAD to have this to begin taper.

o The stock market has remained stable as well. But I believe 10yr stability is more important to the Fed right now.

o They have “talked” taper to death since June. Talk is cheap. It’s time to actually DO something.

o What more can be said? They’ve TALKED this thing to death. There is NOTHING NEW to say.

o They’ll never know what to expect from the market until they actually DO IT!

o What better time to do it then now. “If” a taper turns out to cause “unwanted” market moves, what better time to change your mind than with a new fed chairman.

o Can you imagine how bad it would look if Yellen started taper, causing huge market moves, forcing her to change her mind? She’d look ridiculous.

o However, as a new chairman, she can come in and say that her and the new vice chair disagreed, and pushed to have the levels reinstated to $85bil total, if not more.

o Something that has been missed by most of the media are the recent statements by several Fed presidents about how CLOSE the decision was in Sept.

o The dissenting president’s also said they have move “closer” to voting for a taper in the past couple of months.

o No one from the Fed really ever said that until recently. This suggests to me that it’s going to be “close” again, but to the taper side this time.

o The next FOMC meeting is January 29^th 2014, Bernanke’s last meeting. And there is no press conference scheduled to follow.

o I can’t fathom the Fed would “start” a taper at a meeting where there will be a new chairman days later.

o And I can’t fathom the Fed would “start” a taper without having a press conference to explain why.

o That means the “possible” start of taper would be pushed to the next FOMC meeting on March 19^th 2014.

o I don’t think there is anyway the Fed wants to wait until March to get this taper started.

· Why $10 billion?

o This was the number floated back in June.

o Any less, they’ll look silly.

o Anymore, and it could freak the markets out. No surprises!

· Why $10 billion from just treasuries?

o They do not want to do anything to hurt the housing “recovery”.

o Even today, and even though, housing starts hit a 5yr high, the Mortgage Bankers Assoc. applications index hit a 13yr low!!!

o This is an odd relationship, and it holds for mortgage “purchase” applications and starts as well.

o This is evidence of the huge numbers of homes being bought with CASH. And I think that also means investors. That’s not necessarily a good thing.

o That means less financed refi’s and purchases, both of which will be needed to free up consumer cash, and to continue the housing price recovery.

· Other Fed “qualifications”?

o Percentages! Treasury issuance and mortgage issuance has been decreasing over the past year.

o THUS, the Fed’s “percentage” purchases of outstanding issuance has actually been increasing! Most people miss this.

o THUS, even though they are tapering, the “actual” effect, due to lower issuance, will not be as large as the $10bil suggests.

o They’ll again STRESS the importance the market “should” put on their forward guidance of zerobound rates, and far less importance on their monthly purchases.

· Any more evidence?

o You bet! For anyone who watches CNBC, you’ll be familiar with their head economist Steve Liesman.

o But if not, suffice it to say he RARELY sticks his neck out. He ALWAYS plays it safe.

o Given that, Liesman did an about-face two weeks ago from a no-taper bias at this meeting to a taper bias.

o Rick Santelli described it perfectly, saying there’s no doubt Liesman has excellent access to Fed participants, and given his change of mind, he’s betting someone “whispered in his ear”.

o I totally agree with this. Liesman NEVER takes risks. And changing his stance weeks before the meeting is significant.

o I think he “knows”!

Randy Woodward
Managing Director, Fixed Income Capital Markets

One Burton Hills Blvd, Ste 225, Nashville, TN 37205

( Toll-Free 800.764.7621

6 Mobile 615.969.2682

Randy.Woodward@RaymondJames.com

Tuesday, December 17, 2013

Federal Reserve - As you may know, Stanley Fischer appears to be the likely new Vice Chairman of the Fed. Unique feedback!

Mr. Fischer was the governor of the Bank of Israel from 2005 to 2013. Just as it’s likely that Janet Yellen will be the next Fed Chairman, it appears Stanley Fischer will be the next Vice Chairman. As Vice Chair, Yellen was very influential in constructed the Fed’s efforts to “save the world” over the past several years. Given Fischer oversaw Bernanke’s thesis and also taught the ECB’s President Mario Draghi, not to mention Larry Summers as well, I suspect he will be VERY involved in the Fed’s efforts while he’s there.

With all that said, you may be remember I spent a week in Israel this past summer with a dear friend, who invited me to his son’s wedding. Knowing that Yosef has lived there since the 70’s and certainly has a vested interest in the functioning of his country, I decided to ask his opinion of Mr. Fischer, and I thought you might find the feedback interesting.

Randy,

Stanley Fischer... Here, he is recognized as perhaps the best Chairman of the Israeli Bank that we had. He was very good at being a-political and thinking outside of the box when the economy was strained. No banks failed during his term of office and we weren't affected by the mortgage crisis. Regarding that, he is sometime criticized for being too wary with regard to standards that he set up for mortgage applications. The criticism comes basically because housing costs are still rising at a fast pace and the population is feeling that it is next too impossible to buy a property. In my opinion, he shouldn't be blamed for that because the shortage of new building is mostly due to the different levels of gov't for not putting more land on the market. {the American gov't may also be blamed because anytime we announce a new neighborhood around Jerusalem, we are slapped on the wrists because of so-called "illegal" settlement activity and impeding peace}.

Fischer saved the exports and the exchange market single-handed when it looked like the US dollar was going to hit rock bottom. He instructed the bank to buy up unprecedented quantities of green paper, thus saving the exporters. [It seems that we may need someone that thinks like him in the next few weeks/months, too].He was very highly respected and an independent, even-handed and reliable monetary governor. Besides that. I can't say too much more. I liked his personal appearance! By the way, why are you interested in him?

Be well and if you have time, I'm listening.....

Yosef

I of course let Yosef know Mr. Fischer may have a new job soon.

Randy

Randy Woodward

Friday, December 13, 2013

The Real US Unemployment Rate: 11.5%...the effects of the participation rate on the unemployment of 7%.

· Inflation, as the Fed measures it, is still historically low. And even through the unemployment level has “improved” to 7%, this analysis clearly shows that the unemployment is mostly due to the tanking participation rate. And Bernanke did mention his concern with the “quality” of unemployment numbers in his last speech. Thus, it would seem that neither of their goals of 2% inflation and <6.5% (with quality) are being bet. So it seems they have no “reason” to taper.

· However, if you’ve had time to read my analysis of Bernanke’s speech from Nov. 19^th, he also made it clear that they are worried about the efficacy and possible risks of continued QE. He also made the statement that the market’s reaction (bond market selling bonds and forcing yields higher) to the mere mention of a taper was “neither wanted nor warranted”. I still can’t believe he actually said that out loud.

· With all that said, I believe the Fed desperately wants to start tapering as soon as possible. And as I mentioned earlier this week, taper talk has increased over the past week and the 10yr has “behaved” this time around. Thus I believe that as long as the 10yr continues to behave, the Fed will announce a taper at the conclusion of the FOMC meeting next Wednesday.

· I also believe the taper will be 10bil. That was the number floated last time, and anything more or less may cause market moving interpretations. The Fed will want this to go as smoothly as possible.

The Real US Unemployment Rate: 11.5%

ZeroHedge

While it may appear at first glance that the first chart below shows just one data series, what we have shown are two data sets: one presents, on an inverted axis, the Civilian Employment-to-Population rate, which unlike the unemployment rate as a fraction of the labor force (most recently printing at just 7%), has barely budged since the Lehman collapse. The other data set shows what an implied unemployment rate as calculated by Zero Hedge would be assuming a long-term average of 65.8% worker labor participation rate.

As we reported earlier, according to the BLS this number most recently was 63.0%: a 20 bps rebound from the 35 year low posted in October, but still woefully wrong. The chart shows much more accurately what the real unemployment rate would be when looking at the overall noninstitutional population instead of the ever rising amount of Americans who for one reason or another are not in the labor force.

On the next chart, we then proceed to juxtapose the implied unemployment rate with the officially reported BLS data.

In short: applying a realistic labor force participation rate to the unemployment rate series, shows that the real US unemployment rate is now 11.5%, a 4.5% difference from the reported number, and the second highest ever, only better compared to October's 4.7%.

Of course, don't inform the Fed of this discrepancy: if aware, the Fed's monetary mandarins would likely never taper. Then again, if indeed the Fed never does taper as many suggest (since it is the flow, not the stock), we will know just which series of unemployment data the Fed is looking at.

Randy Woodward
Managing Director, Fixed Income Capital Markets

One Burton Hills Blvd, Ste 225, Nashville, TN 37205

( Toll-Free 800.764.7621

6 Mobile 615.969.2682

Randy.Woodward@RaymondJames.com

Wednesday, December 11, 2013

Perspectives : I just can't see how this is going to end well.

Some Stunning Perspective: China Money Creation Blows US And Japan Out Of The Water

With private sector loan creation in the US and Japan virtually unchanged since Lehman levels (and the US in danger of posting a negative comp in a very months) and Europe loan creation contracting at a record pace, it falls upon the Fed and Bank of Japan (and possibly the ECB soon) to inject the much needed credit-money liquidity into the system. And, as everyone knows, month after month the Fed and the BOJ diligently create $85 billion and $75 billion in new outside money out of thin air (that this "credit" ends up in the stock market is a different topic).

So to help readers get a sense of perspective how the US and Japan compare when matched to China, below we present a chart showing the fixed monthly "money" creation by the Fed and the BOJ compared to the most comprehensive money supply aggregate available in China - the Total Social Financing - for the month of November. The chart speaks for itself.

Basically, while everyone focuses on the breakneck money creation by the Fed and the BOJ, what happened in the past month is that China quietly created some 20% more money. Perhaps most importantly, between these three entities, nearly $400 billion in liquidity was created de novo in one month! Because when the entire world is a credit-fueled Ponzi scheme, these are the kind of numbers that matter.

For those curious, here is a more detailed breakdown of the Chinese numbers from Bank of America.

New bank loans and TSF rebounded notably in November

Despite higher and volatile interbank rates and rising bond yields, credit growth remained quite robust towards year-end. Two most watched data points, new bank loans and Total Social Financing (TSF), rebounded notably to RMB625bn and RMB1230bn respectively in November from RMB506bn and RMB856bn in October. YoY bank loan growth remained unchanged at 14.2%, while yoy outstanding TSF growth moderated to 19.5% from 19.7%. Today’s money & credit data should be positive for markets which have been worried that the PBoC could tighten credit supply to reduce leverage by citing rising bond yields and interbank rates.

Details of TSF: All financing activities accelerated

New entrusted loans rebounded notably to RMB270bn in November from RMB183bn in October, while new trust loans increased to RMB102bn from RMB40bn.
New corporate bond rose to RMB138bn in November from RMB107bn in October. We note that government and corporates delayed their bond issuance or scaled down the size after bond yield soared, but the net corporate bond issuance in TSF still rebounded due to a smaller amount of expiry in November from October.
New FX loan edged up to RMB12bn in November from RMB5bn in October.
Non-discounted bankers acceptance (BA) increased by RMB6bn in November after falling RMB40bn in October. We think the monthly numbers are particularly volatile, and there is no need to overly-interpret it (This is also the reason why we exclude it from calculating our revised TSF growth.)

Loan details: demand for working capital remained decent

New MLT corporate loans fell to RMB86bn in November from RMB144bn in October. Concerning seasonality, the number is not low. Note that it dropped to –RMB3bn in November 2012 from RMB169bn in October 2012 despite supportive policies and recovering growth momentum then. We believe policies would remain relative neutral in coming months and there could be no sudden reversal of policies.
New short-term corporate loans rose to RMB241bn in November from RMB215bn in October. Meanwhile, discounted bills also increased by RMB19bn after falling RMB71bn. It suggests loan demand for working capital remained decent.
New MLT loans to household (mainly mortgage loans) rebounded to RMB182bn in November from RMB154bn in October, supported by strong home sales momentum in previous months. New short-term loans to households rose to RMB80bn in November from RMB51bn in October, reflecting that SME loans could remain supported.

* * *

So how long before the developed and developing world "have" to create $1 trillion or more in money supply each month to keep the house of cards from toppling?

Randy Woodward
Managing Director, Fixed Income Capital Markets

One Burton Hills Blvd, Ste 225, Nashville, TN 37205

( Toll-Free 800.764.7621

6 Mobile 615.969.2682

Randy.Woodward@RaymondJames.com

Thursday, December 5, 2013

Security expert David Kennedy was interviewed again this morning on the HealthCare.gov site's lack of security.

David describes how there are 400+ known bugs, many ways for the site to be hacked not only by well-funded sophisticated hackers, but even run of the mill hackers. All the information going into the system which includes social security numbers but now also credit card numbers that are used to pay for this service can be captured by the hackers. David explains that it appears to him that security was never a thought as they built the site. He also explains that the security will NEVER be developed properly while the site is still running. Essentially, he says that unless the site is shut down and rebuilt, it will NEVER have the necessary security to protect private data.

By the way, in his first interview Nov. 25^th which I have attached below, he said unlike all private sites such as Amazon, Amex, Walmart, etc, the government does NOT have to inform clients if there was been a security breach and capture of private information. How nice!

Randy

Here is the latest video of security expert David Kennedy describing how bad the security of HealthCare.gov really is.

http://video.cnbc.com/gallery/?play=1&video=3000223660

Here is David’s interview from Nov. 25^th.

http://video.cnbc.com/gallery/?play=1&video=3000221159

Randy Woodward
Managing Director, Fixed Income Capital Markets

One Burton Hills Blvd, Ste 225, Nashville, TN 37205

( Toll-Free 800.764.7621

6 Mobile 615.969.2682

Randy.Woodward@RaymondJames.com

Monday, December 2, 2013

Interesting article from the New York Fed on "Who's Lending in the Fed Funds Market?"

Who’s Lending in the Fed Funds Market?

Gara Afonso, Alex Entz, and Eric LeSueur

The fed funds market is important to the framework and implementation of U.S. monetary policy. The Federal Open Market Committee sets a target level or range for the fed funds rate and directs the Trading Desk of the New York Fed to create “conditions in reserve markets” that will encourage fed funds to trade at the target level. In this post, we use various publicly available data sources to estimate the size and composition of fed funds lending activity. We find that the fed funds market has shrunk considerably since the financial crisis and that lending activity is now dominated by one group of market participants.

Data on the U.S. Fed Funds Market
The fed funds market consists of unsecured loans of U.S. dollars among depository institutions and certain other eligible entities, including government-sponsored enterprises (GSEs). It’s no easy matter to gauge the size of the market, as comprehensive data aren’t available. However, we can estimate its size and composition by aggregating data from publicly available regulatory filings, such as the FR Y-9C, call reports, and 10-Qs. We collect information from hundreds of institutions and use data from the highest level of each organization to avoid double counting. Although we can’t obtain a complete view of the market, our conversations with market participants suggest that these reports capture most fed funds transactions.

Size of the Market
Our estimates suggest that fed funds lending activity has decreased significantly since the beginning of the financial crisis. As shown in the chart below, at the end of 2012 institutions reported lending over $60 billion in fed funds—compared with over $200 billion in 2007.

Several factors have contributed to this decline in trading volume. For one, the expansion of the Federal Reserve’s balance sheet since late 2008 has elevated the level of excess reserves in the banking system. This has reduced the need for many institutions to borrow fed funds to meet reserve requirements and to clear financial transactions. Also, in the fall of 2008 Federal Reserve Banks began paying interest on excess reserves (IOER) to depository institutions. The payment of such interest has reduced the incentives for depository institutions to lend (sell) fed funds at rates below IOER.

In this new environment, who’s lending in the fed funds market? Data suggest that depository institutions, which accounted for more than half of fed funds sold precrisis, now account for a relatively small share of lending activity. Specifically, bank holding companies (BHCs), standalone commercial banks, foreign banking organizations (FBOs), and thrifts represented 26.3 percent of the total lending market at the end of 2012, compared with nearly 60 percent in the fourth quarter of 2006.

Under the current trading dynamics of the market, the primary sellers of fed funds are institutions not eligible for IOER, specifically GSEs. While some have attributed lending activity to Fannie Mae and Freddie Mac, financial statements indicate that those firms reduced their fed funds participation in 2011 and haven’t been active in recent quarters. If not depository institutions, Fannie Mae, or Freddie Mac, then, who’s lending in the fed funds market?

Federal Home Loan Banks
Created by Congress during the Great Depression to support financing for housing and economic development, the Federal Home Loan Bank (FHLB) System comprises twelve regional cooperative banks. The FHLBs serve as financial intermediaries to their members, which include banks and certain other institutions. A key component of the FHLB business model is funding to members through collateralized loans known as “advances.”

FHLBs play a key role in fed funds lending, accounting for almost 75 percent of total lending in the last quarter of 2012. Financial statements indicate that, historically, each of the twelve FHLBs has participated in the fed funds market to varying degrees. As shown in the dynamic chart, the share of fed funds sold by FHLBs has increased significantly since the end of 2006, from close to 40 percent in the fourth quarter of 2006 to almost 75 percent at the end of 2012, down from a peak of 83 percent in the fourth quarter of 2010.

The predominant lending role of the FHLBs helps explain why the fed funds effective rate has largely printed below IOER. As the FHLBs aren’t eligible to earn IOER, they have an incentive to lend in the fed funds market, typically at rates below IOER but still representing a positive return over leaving funds unremunerated in their Federal Reserve accounts. Institutions have an incentive to borrow at a rate below IOER and then hold their borrowed funds in their reserve account to receive IOER and thus earn a positive spread on the transaction.

Given the importance of the fed funds market to U.S. monetary policy, an understanding of the shift in fed funds trading dynamics in recent years and the role played by FHLBs is essential to future policy and research.

Randy Woodward

Friday, November 29, 2013

I think the Fed is frustrated, and this speech by Bernanke seems to prove it.

Attached is a speech by Ben Bernanke titled "Communication and Monetary Policy" that he gave to the National Economists Club Annual Dinner on November 19th, 2013. I believe his is a VERY important speech to read and contemplate. Below are some of the things I found particularly interesting.

I've read through this speech several times and below are some highlights, but I recommend you read it for yourself. Even though Bernanke will be leaving the Fed at the end of January, I have no doubt he still speaks for the Fed. Thus, I think it's important to try and understand and digest the messages he is delivering.
There are two primary messages Bernanke tries to deliver in this speech. First, the Fed Funds rates will be low for a VERY long time Second, this alone should be enough to keep long rates down, thus making it ok for them to slow down and eventually exit LSAPs. Which says to me, rates will be low for ever, and we need to get the hell out of LSAPs.
The title alone, "Communication and Monetary Policy", gives you a clue as to the case Bernanke is trying to make. He is wanting the markets to put equal if not more importance on what the Fed "communicates" to the markets, and NOT the “money” he’s inserting into markets via "monetary policy" or LSAPs (Large Scale Asset Purchases). In my opinion, you can almost sense that Bernanke is somewhat frustrated with how the markets have attached more importance to LSAP as opposed to his "forward guidance". More on this as we go.
Page 1, "enhanced transparency is increasing the effectiveness of monetary policy." Transparency equals communication. Essentially, Bernanke is going to try and make a case that the Fed's communication of forward rate guidance "should" be more powerful than any LSAPs they do. He admits the future "can be only imperfectly foreseen" (no kidding), yet forward guidance is an essential element of monetary policy.
Page 2, "expectations matter so much that a central bank may be able to help make policy more effective by working to shape those expectations". This argument seems completely ridiculous to me. Not only are the markets to manage their own day to day affairs AND make preparations for future demands, but they must also manage what the Fed is doing right now AND what they "think" the Fed is going to do in the future. So not only will Fed actions affect the future by their current actions, but they want you to react to what they have planned for the future. Seriously! Just get the hell out of the way and the markets to their job!
Page 3, "it is beyond the power of the central bank to set a longer-run target for employment that is immutable or independent of the underlying structure of the economy". Again, no kidding!
Page 4, ok! this one was VERY important! "Currently, FOMC participants' estimates of the longer-run normal unemployment rate, as publicly reported in the quarterly Summary of Economic Projections, range from 5.2 to 6 percent." This is very important because later Bernanke will go on to explain that when he referred to 6.5% unemployment as a time they would consider policy changes, he was not defining a "trigger", but simply a "threshold". A time to start “considering” policy changes, NOT a time to start. Thus I think this mention of 5.2 to 6% shows that the FOMC wants unemployment well below 6.5% before they start to pull back on monetary policies. Thus an adjustment to forward guidance. You'll see that this essentially EXTENDS the life of zero bound rate policy well into the future!
Page 5, "this increased transparency about the framework of policy has aided the public in forming policy expectations, reduced uncertainty, and made policy more effective." I don't think so. I think they've done nothing but inflate asset bubbles and caused markets to put future planning on hold, because they have no clue what the Fed will do next. Bernanke goes on to explain that because of this unforeseen crisis, they had to come up with NEW policy tools. Ok, so you want markets to react to your policies, yet you didn't see the last crash, AND you are now using NEW techniques. How the hell is a market supposed to operate under “new” policies to come let along current policies in place? It obviously cannot!
Page 6, "The recoveries from most post-World War II U.S. recessions had been relatively rapid, with production, unemployment, and other key variables returning to close to normal levels within six to eight quarters." NOT THIS TIME!
Page 7, "After the FOMC stated in December 2008 that it would likely be appropriate for the federal funds rate to remain near zero for "some time," it changed the formulation in March 2009 to "an extended period." However, such language did not convey very precisely the Committee's intentions." Well why not just say "we are going to keep rates low for a super duper unbelievably crazy long freaking time"? The message throughout his speech is an almost begging of the markets to understand that they will keep the fed funds rates lower for a VERY VERY VERY long time, going on to say that even when it looks like the economy is well on the mend, rates will still remain low long after.
Page 8, moving from how long they were going to keep rates low, they decided to move to "so-called state-contingent guidance", and apparently this provided greater clarity. We'll see later in the speech it in fact did not.
Page 9, this is where Bernanke explains that the unemployment rate is a "threshold" and not a "trigger". He also offers a few reasons why the "quality" of unemployment will matter also, like payroll employment, rates of hiring and separation and the big one, LABOR FORCE PARTICIPATION. If you've paid attention to my emails on this last topic you'll know that the participation rate is at a 35 year low, and falling fast! Thus the "quality" sucks!
Page 10, Bernanke starts to talk about LSAP, and comparing that to forward guidance, to keep long term rates low. This is the beginning of his argument that the markets should put more weight on forward guidance versus LSAPs.
Page 11 is a MUST READ! He admits that they have much less experience with LSAP. LSAPs “have other drawbacks that include the risk of impairing the functioning of securities markets”. At least he is admitting they really have no idea what the ramifications are going to be, but there will be some.
Page 12, "In deciding to employ LSAPs, the FOMC has accordingly remained attentive to the possible costs and risks as well as to the efficacy of this less familiar tool,"
Page 13, "the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens." Once again, they are telling us rates will be kept low for a very very long time!
Page 14, "greater uncertainty about the costs and efficacy of LSAPs." "Moreover, to the extent that the use of LSAPs engenders additional costs and risks, one might expect the tradeoff between the efficacy and costs of this tool to become less favorable as the Federal Reserve's balance sheet expands." Bernanke starts to talk about his "intention" of "possible" tapering near the end of 2013. He even points to the fact that he said if data remained consistent the Committee would LIKELY begin measured reductions in LSAPs, yet he also said they could increase the purchase if data went bad.
Page 15, "Financial market movements are often difficult to account for," Really! Did you really just say that out loud? This is where the astonishing HUBRIS of Ben Bernanke begins to shine through! He goes on to explain three reasons why rates "actually" went up, OTHER than the obvious reason that the largest buyer was talking about buying less. 1, the economy was improving and thus some increase was warranted. BS! 2, some institutions started to unwind levered positions, and in reality this was a good thing. That would be good thing if they delevered, problem is they levered right back up when he didn’t go through with the taper. And finally 3, it appears that the Feds forward rate guidance became less effective "after June" and the markets assumed tapering meant pulling forward the zero bound. Again, BS! The VERY moment they started LSAPs, they became more important to long term rates than forward guidance. 85 billion a month WILL have an effect on prices.
Page 16, Ok! Check this out, this was the best part of the whole speech, "To the extent that this third factor - a perceived reduction in the Fed's commitment to meeting its objectives - contributed to the increase in yields, IT WAS NEITHER WELCOME NOR WARRANTED, in the judgment of the FOMC." ARE YOU KIDDING ME! So not only were you surprised by the markets reaction, you were offended by it as well. AND, the market's reaction was "WRONG"? Can "HUBRIS" be demonstrated any better?
Page 16 continued, he then goes on to explain that they decided not to taper because job market metrics looked "mixed" and they were worried about the fiscal debates. BS! BS! BS! They didn't taper because rates were ramping up, and markets ALL OVER WORLD were rapidly deteriorating! THAT"S THE ONLY REASON!
Page 16 again, it gets even better here "Although the FOMC's decision came as a surprise to some market participants, it appears to have strengthened the credibility of the Committee's forward rate guidance, in particular, following the decision, longer-term rates fell and expectations of short-term rates revived from financial market prices showed, and continue to show, a pattern more consistent with the guidance." WOW! Just when I didn't think his level hubris could climb any higher, he straps on a jet-pack and takes off. No, rates came down a bit and stabilized for now because no one in the market has a clue if and when you are going to get the hell out of the markets. You even said if things don't look as good as you want, you may raise LSAP purchases. How is anyone supposed to behave in this market. GOOD GRIEF MAN!!!!
Page 17 and 18, rates will remain low long after LSAPs have ended, and "perhaps" well after the unemployment "threshold" is crossed.
So there you have it! My conclusion, they are worried about the efficacy and risks of LSAPs and they want to get the hell out. Yet they DO NOT want the markets to react to this. They want you to understand what they mean by keeping rates low for an "extended period of time". It means a VERY VERY VERY long time.THUS, you Mr. Market need to keep buying long term bonds and do not let the rates go up.
With all this said, Bernanke did not mention inflation very much. That’s because THERE IS NONE, at least not in the traditional sense. The Fed does make it clear that if inflation gets out of control, and this means "well" above 2%, not just at or slightly above it, they will stop it. But again as you may have seen in previous emails, M2 velocity, which means how effective increased money supply by fed or market is at creating GDP, is at the lowest EVER MEASURED and falling fast. This means the Feds printing has been completely ineffective at creating GDP. And thus ineffective at creating inflation. At least not in production. There of course has been inflation in asset bubbles ALL OVER THE WORLD, including US stock and bond markets.

I hope you read and contemplate this speech. The Fed will keep the Fed Funds rate at zero for the rest our careers. The possibility of a negative rate, which means being charged for deposits, is even being mentioned now. Something has to give. Someone needs to end the Fed's control of the world. It will not be pretty, but we must let the markets adjust on their own, or they will NEVER truly heal.

Randy Woodward