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Tuesday, March 29, 2011

Fed Speak... Gotta Know The Enemy

I you are like me you wish they would release a QE ETF. 

That would be a sure thing in the market today...

Instead, the Feds just announce QEII and make EVERYTHING a sure thing!

The S&P is up 10.5% since QEII.  QEII is about as awesome to the S&P as crack cocaine is to the ghetto! 

The real question about QEII is:  Will there be QEIII?

That is a question for the wizards of the FOMC:

Below are a list of wizards, some of whom believe in magic and others that just wear a funny hat for the paycheck.  By listening closely to the wizard speak we can determine weather or not there will be another round of QE:


Fed Wizard Speak consistent:  'Dual Mandate' of maximum sustainable employment and low stable inflation.
Stance on Stimulus post QEII:  Keep the presses running mang, but be ready to turn them off... maybe (not really.... just don't make me look bad on your blog)!
Dudley's views 
He (Dudley) predicted "job growth will increase considerably more rapidly in the coming months," but he said that is something to be welcomed, not feared.
"A substantial pickup is sorely needed," he said. "Even if we were to generate growth of 300,000 jobs per month, we would still likely have considerable slack in the labor market at the end of 2012."
Echoing Fed Chairman Ben Bernanke, Dudley said "the economic outlook has improved considerably in the past six months," but added "we are still very far away from achieving our dual mandate of maximum sustainable employment and price stability."
"Faster progress toward these objectives would be very welcome," Dudley said.
Dudley is a wild card-- he goes with the flow, but he has consistently been in favor of more stimulus.  Trying to achieve low employment with low inflation is asinine when you are devaluing your currency as part of your agenda and your currency dictates the price of everything in the world.  Consumers are freaking out after the recent rise in prices-- what do the Feds expect when they reach 2.0% inflation? 


Fed Wizard Speak consistent: I am unsatisfied with everything! 
Stance on Stimulus post QEII:  QEIII, QEIV, QEV, QEVI... ect.
Evans Views
Despite clear signs of progress, I am not yet satisfied with the pace of improvement,” Evans said in his speech. “Unemployment will remain uncomfortably high for too long relative to our employment objective. So accommodative monetary policy continues to be warranted to address this part” of the Fed’s congressional mandate, he said 
Evans is hooked on the QE--He may be more gone than Ben Wizzie, but I am certain he is not ready to pull the punch bowl.  Count Evans in for QEIII... and QEIV for that matter. 


Fed Wizard Speak consistent: Raise Rates! 
Stance on Stimulus post QEII:  Should have never happened.
PLOSSERS PLAN (see PDF of Speach titled EXIT)
If this forecast is broadly accurate, then monetary policy will have to reverse course in the not-too-distant future and begin to remove the massive amount of accommodation it has supplied to the economy. Failure to do so in a timely manner could have serious consequences for inflation and economic stability in the future. To avoid this outcome, the Fed must confront at least two challenges. The first is selecting the appropriate time to begin unwinding the accommodation. The second is how to use the available tools to move monetary policy toward a more neutral stance over time
I like Plosser.  Guy is consistently against any more easing.  The problem is that Plosser is the diamond in the rough of voting FOMC members... so really, he is the rough in the diamond.  While he is one voice, that is really all he has.

Other Fed members tend to be pretty high on the QE right now-- Kocherlakota, Yellen, and of course the Master Wizard Ben Wizze.  Kevin Warsh was a Hawk, but he stepped down in Feb:  Warsh is OUT.

Why step down? Maybe he didn't like the QE peer pressure from the rest of the wizards.  Maybe he knows someting we don't know-- Like Cypress Hill said, "When the Shit Goes Down, You Better be Ready."  I would guess that a young dude like Warsh didn't want to be tied to the unravelling that will follow the departure of QEWHATERVER. 


Consumer reports are hitting and they are painting a grim picture.
  • Michigan Consumer Sentiment Fell to 67.5 in March from 74.2 in January
  • Consumer Confidence fell to 63.4 in March from 72 in February.
KEY POINTS: * The Conference Board, an industry group, said its index of consumer attitudes fell to 63.4 in March from a revised 72.0 in February. The median of forecasts from analysts polled by Reuters was for a reading of 65.0. Forecasts ranged from 55.0 to 72.0. * The expectations index slipped to 81.1 from 97.5, while consumers' expectations for inflation in the coming 12 months hit its highest level since October 2008. * The present situation index rose to 36.9 from 33.8. Consumers' labor market assessment worsened. The "jobs hard to get" index rose to 44.6 percent from 44.4 percent the month before, while the "jobs plentiful" index slipped to 4.4 percent from 4.9 percent.
It looks like high gas and food prices are not as awesome as one expected. 

Is this painting a picture of what the future holds for the consumer?  High prices and no jobs?

Do the Feds know the real enemy they are fighting? 

Their real enemy is the consumer, not gas prices or food prices and not deflation.  Spending picked up in Q4 2010 due to prices being rock bottom and consumers balance sheets finally looking a little better due to lower prices.  Now the tables have turned:  Prices are rising and the consumer is running out of sweet sweet fiat dollars.  Disposable income is falling and spending is slowing... Disposable income down

The consumer has the ability to screw up the whole QEFOREVER plan if they stop spending, and/or run out of money for ipads and plasma TVs.  While the wizards try to create inflation, they fail to see that they are not actually fighting deflation, but instead fighting the one they are trying to entice to spend-- you and I consumer.  Why would they try to raise prices when they know that they can not raise wages due to unemployment.  People can only spend money if they have money... without wage increases, higher prices mean no more money for discretionary spending at Build-A-Bear and Applebee's.

It is not different this time-- higher prices, whether CPI or not, will lead to a consumer spending halt.  It happened in 2008 and it will happen again.

To combat, Feds stimulize more-- on prime time press conferences this time around!   

I say that the Feds do not know their real enemy.

Well, Gotta know the enemy...

Will the next round of stimulus keep pushing the S&P higher? 

Not if it comes with $5 gas and $13 applesauce...


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  2. The Fed's goal is to inflate its way out of the housing crisis. $5 (only?) gas and $13 applesauce are necessary evils as long as people are no longer underwater on their mortgages.

    Not saying I like it or agree with it, but this has been telegraphed by the Fed since the beginning.