Category: Federal Reserve

Fred Hickey compares today’s central banks to 19th century patent medicine factories

Fred Hickey, editor of The High-Tech Strategist ($150/year,, grew up in Lowell, Massachusetts, known as the “Birthplace of the American Industrial Revolution.”  In his latest HTS he discusses the genesis of the patent medicine industry in his hometown during the mid-1800s:

For a time, Lowell became America’s largest industrial center…  In addition to the textile factories, other industries grew up in the city around the same time, including patent medicine factories – Father John’s Medicine and J.C. Ayer & Co. among them.

Dr. J.C. Ayer founded J.C. Ayer & Co. in Lowell and his factory became one of the largest of its kind in the world.  Advertising was the key to success…, with the company distributing millions of copies of its free “almanac” (propaganda) annually around the world – in eight languages, including Chinese.  A sample from the almanac:

“The skillful pilot steers his ship through all dangers and guides her safely to port.  So the skillful physician pilots his patient through the perils of sickness to perfect health.  In cases of General Debility, so common at present day, he recommends the use of Ayer’s Sarsaparilla, because of its superior efficacy in aiding the formation of pure and vigorous blood, thereby restoring the normal condition to every fibre, organ, nerve, and muscle of the body.  It cures others and will cure you.  This standard remedy is compounded of the best tonics and alternatives known to science, and its superior qualities as blood-purifier and invigorator have stood the test of nearly half a century.”

Ayer became fabulously wealthy, amassing a fortune of some $20 million – quite a sum for the time.

Though Dr. Ayer never practiced medicine, the cover of each J.C. Ayer almanac was decorated with classical engravings such as one showing the Greek physician Hippocrates standing atop the earth declaring: “Heal the sick.”  What was not to believe with such evidence coming from a great doctor?

Hickey goes on the draw the parallel to central banking:

 Today, we look back and laugh – how could these people be so gullible?  Yet, the world is currently under the spell of its own modern-day quacks – known as central bankers.  Central bankers are touted as having the cure for all of our financial problems.  Their tonic, with the scientifically-sounding name of “quantitative easing,” or QE for short, is guaranteed to restore our financial health, to cleanse us from all our ills.  Whether the cause is spending beyond our means (perennial trillion dollar deficits and gigantic debts), making entitlement promises we cannot keep, building a gigantic welfare state of dependents, having a dysfunctional (and sometimes corrupt) government, constructing a byzantine tax system, tying up our businesses in a web of regulations, enabling “too-big-to-fail” banks to grow monstrously bigger – all can be cured with the magical elixir called QE.

Our skillful physician pilots (brandishing their doctorates from Princeton and M.I.T.) have discovered a miracle cure to be sure – at least that’s what one hears all day long from the talking heads on CNBC…  The media dissects Bernanke’s every utterance for clues as to whether he will supply more of the miracle or not.  The cameras are always on – even when he’s just laying out lame jokes at a Princeton commencement ceremony.

The QE medicine is seductive and addictive…

The best part yet – the QE medicine that he and other central bankers around the world are ladling out tastes so good… With QE, stocks will never fall on Tuesdays (20 straight up Tuesdays in a row), stock markets will never again have a 5% “correction,” (nearing 200 days without a 5% decline), investors can lever up with margin debt to record levels ($384 billion and counting – exceeding the 2007 pre-crash level)…  Investors have become so addicted to the QE wonder drug than even the merest hint of a lower dosage (tapering) sends up cries of anguish from the financial world.  Stock prices wobble; interest rates soar and CNBC anchors throw hissy-fits.

Other than the hallucinogenic effects, is the drug working?

Despite an additional $6 trillion of deficit spending, 0% interest rates and trillions of dollars of newly-created high-powered monetary reserves by the Federal Reserve (QE) that has driven asset inflation sharply higher (stocks, bonds, farmland, art and gold); over the past 4+ years we have experienced the slowest economic recovery in post-war history…  Last month investors celebrated a pathetic 165,000 jobs created, when 278,000 of those jobs were part-time.  In other words, we lost another 113,000 full-time jobs.  The U-6 unemployment rate (including part-time workers unable to find full-time work) ticked UP to 13.9%… With jobs hard to get and real inflation-adjusted incomes falling, the average American consumer is under pressure.  Witness the fairly miserable first quarter sales results from America’s largest retailers reported last month.  Same-store sales fell year-over-year at Wal-Mart, Target, Kohl’s and Sears…  Yesterday we received the Institute for Supply Management’s (ISM) report for May which, at a reading of 49.0, showed the biggest contraction in American manufacturing activity in four years – since the “Great Recession” of 2009…  I’ve been going through scores of first quarter earnings reports and conference calls from the largest technology companies.  The numbers and commentary were consistently gloomy – it was the worst batch of results I’ve seen since the end of the Great Recession.

At this stage of recovery something is terribly wrong.  Let me clue you in on a little secret – money printing doesn’t work.

The Japanese chugged plenty of this medicine…

Japan was the first to try “QE” to resolve its problems (though it was certainly not the first to try money printing).  They’ve been attempting to lift their economy out of a decades-long recession for many years.  The Bank of Japan (BOJ) tripled its balance sheet but did nothing to address the real underlying causes of the disease.  They did not address their lifetime employment system that hobbles business flexibility.  They did little to correct the ridiculous rules and regulations that suffocate the agricultural, medical and retail industries.  They raised taxes.  They massively increased government spending, wasting trillions of dollars and causing a debt pileup (235% of GDP and still rising) – the likes of which the world has never seen from a developed country.  As one would expect, the attempt failed spectacularly.

Yet the American snake oil salesmen claimed they didn’t drink enough!

Dr. Bernanke, and other high priests of central planning (including Paul Krugman) lectured the Japanese that their problem was they weren’t swilling enough of the QE tonic fast enough.  For a decade the BOJ resisted, always citing concerns over inflation.  Finally, Shinzo Abe was swept into power on the campaign promise of more licorice for everyone! After eliminating the key inflation-phobes (Masaaki Shirakawa) from the BOJ and replacing them with Bernanke-like clones (Haruhiko Kuroda), the new era of “Abenomics” was on…  The BOJ announced a plan to double its monetary base (high-powered money) within two years.  In other words, they opted to chug the whole bottle of medicine at once.

After discussing the post-WWI German experiment in money printing gone awry (Weimar hyperinflation), Hickey sees the American experiment ending badly:

Despite this horrific central banker record, U.S. investors still want to believe that Father Ben’s QE medicine will eventually work.  But just because the crowd believes this fantasy, doesn’t mean I have to.  As long as the Fed continues to print tens of billions of dollars a month, stocks can continue to climb higher, but the gap between the economic reality (poor) and the stock valuations (euphoric) widens to ever more dangerous levels.  Another crash is coming and I intend to avoid it – once again.

In conclusion, Fred Hickey offers an antidote to the QE drug:

Throughout history, the antidote to money debasement has always been gold.

Fed officials give their imprimatur to stock market bubble


Last Friday former Fed chairman Alan Greenspan gave support that the 4-year bull market in stocks has room to run:

And right now, by historical calculation, we are significantly undervalued.  The reason why the stock market has not been significantly higher is there are other factors compressing it lower.  But irrational exuberance is the last term I would use to characterize what’s going on at the moment.

On March 4, Fed vice-chair Janet Yellen assured investors:

At this stage, there are some signs that investors are reaching for yield, but I do not now see pervasive evidence of trends such as rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would clearly threaten financial stability.

And on February 26, chairman Ben Bernanke gave stocks his stamp of approval:

I don’t see much evidence of an equity bubble.

Not to question these all-knowing masters of the universe, but there does seem to be a trifle of evidence to the contrary, that perhaps their zero interest rate policy (ZIRP) has stampeded savers into anything hinting at a yield.  Exhibit A: Over $1 trillion has poured into bond funds over the past 4 years (out of money market funds).  Exhibits B and C: Junk bond yields are at record lows and margin debt near record highs.  Exhibit D: Total credit market debt is a record $56.1 trillion (352% of GDP) compared to $49.8 trillion (also 352%) at the top of the credit bubble 5 1/2 years ago.

After the tech bubble burst, The Maestro admitted that when it came to detecting bubbles investors were on their own:

We at the Federal Reserve considered a number of issues related to asset bubbles–that is, surges in prices of assets to unsustainable levels. As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact–that is, when its bursting confirmed its existence.  (August 30, 2002)

Five years later those words proved prescient (one of the few times) as the Fed-heads missed the housing bubble and failed to recognize how it had metastasized into a full-blown credit bubble.  While still at the helm of the Fed, Greenspan weighed in on his 6-year experiment to contain the bursting tech bubble (which he failed to see coming):

Most of the negatives in housing are probably behind us.  (October 26, 2006)

Right before the subprime bubble burst, Janet Yellen was oblivious to any impending trouble:

I’m waking up less at night than I was [over the slowdown in housing].  So far, there’s been remarkably little effect on the rest of the economy.  (February 21, 2007)

After taking the reins at the Fed, Bernanke did his own Alfred E. Newman impersonation:

We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.  (May 17, 2007)

The Federal Reserve’s crystal ball does not do asset bubbles.  When its wizards begin to feel they possess such power (that is, denying the presence of a bubble), contrarians take notice.

Libor problems expose central bank incompetency

Rolling back the tape to August 2007 we’ve witnessed several failed attempts by global central banks when trying to alleviate the international credit crunch. Massive interest rate cuts by the US interventionists have resulted in climbing credit spreads across the entire debt market. Of late the powers at be instituted numerous credit facilities to both banks and brokers in a last ditch effort to keep the walking dead from following the Bear Stearns demise. Of course, when looking at Libor, one of the few remaining barometers in credit land, the rational investor should question the “knowledge and wisdom” of the Bernanke Fed.

Since the introduction of temporary and permanent lending facilities from the man behind the curtain the US Fed’s balance sheet has swapped out over $300 billion in treasuries for questionable mortgage backed securities. The unintended consequence has been a banking system reluctant to lend to one another since the Fed will take just about anything as collateral and lend at reasonably low rates. Based on the most recent auction results the Fed will have lent over 50% of their treasuries to the banking/brokerage community by the middle of June!

Commentary the other day by Federal Reserve Governor Richard Fisher should tell us everything about the impotency of our central bankers:

“This is a new development,” Federal Reserve Bank of Dallas President Richard Fisher said during an appearance in Chicago. “I need to learn more.”

Maybe Mr. Fisher, Mr. Bernanke and the other Fed members should take notes when Mr. Volcker speaks:

“A direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in times of crisis: lend freely at high rates against good collateral,” Volcker told the Economic Club of New York on April 8. “It tests it to the point of no return.”

My Comments: Ongoing intervention by global central bankers continues to distort the credit landscape. As banks and brokers drag their feet on mark to market issues related to Level 2 and 3 assets while failing to disclose off balance sheet exposure the lender of last resort has entered the arena. Unfortunately, the policies implemented have failed miserably leaving the obvious question to ponder: How much of the worthless collateral temporarily inherited by the Fed will ultimately end up being owned by the US taxpayer?

Greenspan defends his legacy

On Tuesday, the Wall Street Journal published an abridged version of several interviews with Alan Greenspan in which he defended his actions from 2001-2005 which many believe fomented a massive credit bubble (present company included). In addition, interviewer Greg Ip ran a front page story on the critique and defense of post-millenial Greenspan. Ip framed the debate along the interventionist paradigm with this line:

The Fed’s low rates and laissez-faire regulatory oversight during his final years are widely blamed for sowing the seeds of today’s financial crisis — one that began in the U.S. housing market and is now battering banks, stock markets, borrowers and consumers around the world.

According to the prevalent interventionist mindset, we’re allowed to criticize the policies of the Fed, but never the institution or the system itself. Strange, Greenspan is supposed to be a disciple of Ayn Rand, complete with free market pedigree. Yet he was a lousy forecaster in both the private and public sector, and did stints as a government employee before taking the position as arguably the most powerful central planner in the world for 19 years. Is it not a total contradiction for anyone to use “Fed” and “laissez-faire” in the same sentence?

The Fed is like a broken candy machine and the chairman’s job is to dispense candy. By definition, a policy of lowering rates to 1% is intended to crank up the machine; sugar highs among the kiddies are the predictable result. Regulating the distribution of candy either limits the amount of candy (contrary to the stated policy) or attempts to means test the recipients (an exercise in futility). Keep in mind, the Fed chairman is a child himself, and owes his priviledged position to the other children hooked on chocolate. As Greenspan said in the Q&A:

I have always seriously questioned [bank examiners’] ability to do more than what counter-party surveillance would do. What evidence do we have that this actually works? Because I know that internal auditors of a bank have significant difficulties in spotting problems and malfeasance within a bank, and the outside auditors obviously have less than the inside auditors. The capabilities of regulators are still less. The problem is not the lack of regulation, but unrealistic expectations about what regulators are able to anticipate and prevent.

How ironic that Greenspan is concerned about moral hazard here (and rightly so), yet was guilty of creating the mother of all moral hazards by attempting to suppress every crisis, beginning with the ’87 Crash. He adopts humility when attempting to regulate the activity of lenders and borrowers, yet very little with regard to the pricing of short-term credit.

Greenspan, Bernanke and every other central banker see the world through an interventionist lens. The boom-bust cycle is never caused by their manipulations of the credit markets, but always seen as an unsavory side effect of capitalism or a “dynamic economy.” The role of central bankers is to mop up the mess and prevent its spreading. They honestly believe this was the lesson of the Great Depression and Japan during the 1990s (even though central bank induced credit expansions caused both bubbles and massive government intervention prolonged and deepened each correction.) This is why Greenspan flooded the system with cheap credit during the tech bust (an insurance policy against the possibility of a Japan-style deflation), and why Bernanke is doing the same today. As Jim Grant wrote in his latest issue, “Who better to manage crises than the institution that instigates them?”

How can the cure be more of what caused the disease in the first place? Einstein defined insanity as “doing the same thing over and over again and expecting different results.”

Fed down to their last few bullets

Wall Street began the week with fear in the financial air as rumors circulated Bear Stearns was unable to meet redemptions from hedge fund clients. The Banking Index probed new lows while T-bill rates followed. Adding to credit concerns were significant spikes in credit spreads, primarily MBS as Fannie/Freddie paper spreads blew wide open exceeding the moves witnessed during the 1998 LTCM debacle. A continuation of margin calls beginning last week pressured hedge fund and other credit related speculators who purged MBS of all flavors to stay alive. Within 24 hours Bernanke and the fearless Fed arrived on the scene with yet another attempt to stop the bleeding:

The Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label
residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process.

Understand this experiment is quite different from the Temporary Auction Facility (TAF) which was introduced several months ago and actually offers cash for MBS collateral. Of course the main objective for the Fed’s TAF was lowering the Fed funds target rate.

I find it interesting that JP Morgan and Bank of America decided to make unprecedented margin calls last week when spreads had already widened the prior week or so. Is 25-1 leverage finally impacting credit availability at the largest commercial banks? How about the immeasurable levels of off balance sheet structured finance experiments gone bad?

Today we read about numerous credit related hedge funds who effectively froze redemptions for partners recently. Of course this is attributed to FASB 157 which went into effect in November, 2007, leading to numerous mark-to-market problems for the mark-to-make-believe world. Some of the twilight zone casualties emerged this morning:

Drake Management LLC, the New York- based-firm started by former BlackRock Inc. money managers, may shut its largest hedge fund, while GO Capital Asset management BV blocked clients from withdrawing cash from one of its funds.
Drake told investors today that it would either liquidate its $3 billion Global Opportunities fund, continue to restrict redemptions or allow clients to shift assets to a new fund. Separately, Amsterdam-based GO Capital prevented customers from taking money out of its $880 million Global Opportunities Fund, saying in a March 11 letter that “current market circumstances don’t allow the fund to sell investments at a reasonable price.”

Hedge funds with more than $5.4 billion have been forced to liquidate or sell assets since Feb. 15 as contagion from the U.S. subprime slump spreads. Others include Peloton Partners LLP’s $1.8 billion ABS Fund, Tequesta Capital Advisor’s mortgage fund and Focus Capital Investors LLC, which invested in mid size Swiss companies.

Finally, as we’ve said from day one, the Fed’s balance sheet is a paltry $866 billion which pails in comparison to the outstanding $43+ trillion of debt in the system. One more bullet has been fired leaving the central planners with fewer rounds of ammunition.

Counting the currency swaps with the foreign central banks, the Fed has now committed more than half of its combined securities and loan portfolio of $832 billion, Lou Crandall, chief economist for Wrightson ICAP noted. ‘The Fed won’t have run completely out of ammunition after these operations, but it is reaching deeper into its balance sheet than before.”

My comments: Bailout talk fills the airwaves so we ask the question: Does Bernanke have enough bullets in the chamber to keep the primary dealers alive until Congress approves a massive mortgage bailout plan? Remember the Fed does not want to destroy themselves so collateral must be blessed by the government in order to keep the Ponzi alive.

Subprime contained in pandora’s box

No less than 5 days after last weeks emergency Fed meeting, Bennie and his merry men were at it again yesterday when they lowered rates by another 1/2%. This total 1.25% cut matched the last desperation move orchestrated under Alan Greenspan back in 1989. Maybe one of the issues keeping Bernanke up all night revolves around this annoying “little” problem:

Losses from securities linked to subprime mortgages may exceed $265 billion as regional U.S. banks, credit unions and overseas financial institutions write down the value of their holdings, according to Standard & Poor’s.

S&P cut or put on review yesterday the ratings on $534 billion of bonds and collateralized debt obligations tied to home loans made to people with poor credit, the most by the New York- based firm in response to rising mortgage delinquencies. Moody’s Investors Service today said losses from mortgages that were packaged into bonds in 2006 could rise to 18 percent.

Of course S&P and their ilk were all embracing the $50 billion containment theme several months ago yet it now looks like Pandora’s box has finally opened. Adding insult to injury for commercial banks is the latest from one of the wise men, Bill Ackman of Pershing Square, who maps out the monoline insurance issues:

“Up until this point in time, the market and the regulators have had to rely on the bond insurers and the rating agencies to calculate their own losses in what we deem a self-graded exam,” Ackman said in a statement preceding release of the letter. “Now the market will have the opportunity to do its own analysis.”

My comments: Further downgrades of the monolines will require approximately $200 billion in fresh capital to make the entire industry AAA rated according to Sean Egan of Egan, Jones & Co. Add in ongoing mark to market losses within the commercial/investment banking business and another $200 billion in new capital is required to recapitalize the system. Of course the interventionists have a “plan” yet we realize all government “plans” lead to additional distortions prolonging the inevitable cleansing process. Can’t we have a nice garden variety recession in order to level the playing field for real wealth creators?

Fed hot air fails to reflate structured finance balloon

Now that the dust has settled regarding the latest Fed rate cuts, most bond fund managers seem rather unenthused. According to PIMCO group:

“The reality is the fundamentals haven’t gotten any better, and, if anything, they’ve gotten worse,” said Mark Kiesel, an executive vice president at Newport Beach, California-based Pimco who oversees $85 billion in corporate bonds.

While concerns from many professional money managers involve credit disruptions.
About three-quarters of 30 fund managers who oversee $1.25 trillion expect a hedge fund or credit market blowup in the “near future,” according to a survey by Jersey City, New Jersey-based research firm Ried, Thunberg & Co. dated Oct. 1.

Is it fair to say a return to normal (pre Fed) market behavior is out of the question?

More than 65 percent of investors in mortgage-backed securities are struggling to find bids for their holdings, according to a survey of 251 institutions last month by Greenwich Associates, a Greenwich, Connecticut-based consulting firm. Among holders of CDOs, the figure is 80 percent.

The U.S. commercial paper market is shrinking. The amount of debt outstanding that matures in 270 days or less fell $13.6 billion the week ended Sept. 26 to a seasonally adjusted $1.86 trillion, according to the Fed. It’s down 17 percent in the past seven weeks.

My comments: There is maybe $6 trillion in mortgage-backed securities outstanding so 65% of that amount would be $4 trillion. In addition, there is approximately $2.5 trillion in CDOs outstanding so 80% of that amount would be $2 trillion. We are probably very close to reaching a situation where there would be NO BID on these securities. Can someone tell me how the world financial system could even function with NO BID on $6 trillion in securities stashed in financial institutions worldwide?

Grading the Bernanke Fed

Here is the Fed’s report card since attempting to preempt asset deflation on August 17th with a surprise 50 basis point rate cut in the discount rate:

Lowering long-term borrowing costs: D
– 10 year Treasury yield: -0.02%
– 30 year Treasury yield: -0.10%

Saving the homeowner: C-
– Countrywide Financial: +0.3%
– Fannie Mae: -6.7%
– Housing Index (HGX): -2.7%

Bailing out banks and Wall Street: B-
– Banking Index (BKX): -0.4%
– Broker/dealer Index (XBD): +8.2%

Encouraging speculation: A
– S&P 500 Index: +8.2%
– Nasdaq 100 Index: +13.3%

Fanning the flames of inflation: A+
– Gold: +13.7%
– Crude oil: +16.7%
– CRB Index: +10.7%

Trashing the dollar: A+
– Trade-weighted U.S. Dollar Index: -4.8%

Congratulations, Ben. You’ve just earned your honorary degree from the Greenspan School of Monetary Madness. You are a quick study and more than worthy of the distinction.

Fleckenstein: Bernanke is the anti-Robin Hood

On MSN Money, Bill Fleckenstein explains how the Bernanke Fed is stealing from the poor to bail out Wall Street’s fat cats.

Market impact of August 17 surprise discount rate cut

Market prices from close of August 16 to September 7:


  • Bank stocks (BKX): -2.95%
  • Brokerage stocks (XBD): +1.59%
  • Countrywide Financial: -3.91%
  • Fannie Mae: -4.04%
  • MGIC: -20.02%

Real estate:

  • REITs (IYR): +3.37%
  • Homebuilding stocks (RUF): -9.93%

Global economic boom:

  • Oil stocks (XOI): +8.63%
  • Technology stocks (NDX): +6.08%
  • Industrials stocks (FCYIX): +5.39%
  • Materials stocks (FSDPX): +8.03%


  • Gold: +5.85%
  • Crude oil: +7.80%
  • Gold stocks (XAU): +20.27%


  • U.S. Dollar Index: -2.19%
  • Japanese yen: +0.67%
  • Swiss franc: +2.49%


  • VIX: 26.23, down from 30.83
  • Rydex bear fund assets: 42.1%, down from 45.0%
  • Market Vane Bullish Consensus, S&P 500: 56%, up from 51%
  • Market Vane Bullish Consensus, Nasdaq 100: 65%, up from 55%

My comment: The added Fed liquidity is going where it is least intended, boosting the inflation, commodities and global boom themes, and putting pressure on the dollar. The old balloons – real estate and the credit sector – continue to deflate regardless. Yet investors are actually more confident and complacent than before the booster shot was administered.

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