Federal Reserve meddlings by way of the various QEs with markets have distorted credit markets and now the Fed heroin drip has the Fed in the position of being the Hunter captured by the Game !

http://www.zerohedge.com/news/2013-11-05/because-fed-mortgage-market-liquidity-bad-when-bear-stearns-failed

Because Of The Fed "Mortgage Market Liquidity Is As Bad As When Bear Stearns Failed"

Submitted by Tyler Durden on 11/05/2013 18:22 -0500

• Bear Stearns
 
• Bond
 
• Moral Hazard
 
• REITs
 
• Russell 2000

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Remember the main reason why the Fed should have tapered, namely the illiquidity in the bond market it is creating with its feverish pace of collateral extraction, and conversion of quality collateral into 500x fwd P/E dot com dot two stocks? Here to put it all in context is Scotiabank's Guy Haselmann: "Through its QE policy, the Fed buys $3 of mortgages for every $1 of origination.  The consequence is that secondary mortgage market liquidity has been decimated: it is as bad as when Bear Stearns failed." That's just MBS for now. However, since the Fed has refused and refuses to taper, the same liquidity collapse is coming to Treasury's first, then corporates, then ETFs, then REITs and everything else that the Fed will eventually monetize. Just like the BOJ.

As a post script, here are some other observations from Haselmann:

• Moral Hazard has run wild due to Fed policies. Risk appetite, complacency, and market speculation are at elevated levels.  Buyers are scrambling to find assets to buy. As a result, there has been a surge in debt issuance, especially of riskier securities like covenant-lite loans, leveraged loans, and payment-in-kind bonds. 
• The Fed does not have an inflation problem, simply because the $3 trillion+ it has created out of thin air has not been lent into the fractional reserve system.  In other words, the velocity of money has been falling.  The lack of visibility health care costs, the national fiscal budget, the tax code, regulatory rules and economic growth generally (to name a few), is so widespread that it is impossible to assess the financial logic behind potential capital investment projects. When this uncertainty fades, the velocity of money will rise and the Fed’s ability to control inflation with be challenged accordingly.
• IPO’s have also come at a fierce pace, taking advantage of investors scrambling to put easy money to work; and who may not be giving enough attention to valuations and the risks involved.  Market pundits seem to fuel investor complacency with daily statements that equity P/E’s are historically cheap.However, comparing today’s “new normal” growth trajectory to the high growth period of the 1990’s seems misguided.  Furthermore, the current environment is unprecedented and the “E” is a rapidly moving target.
• The P/E’s of the top 50 Russell 2000 stocks is over 45.  The P/E of Linkedin is 755, AOL’s is1278, Chipotle’s is 54. After Twitter’s IPO tomorrow, the stock will trade near 42X revenues (because it has no “E”).  Now that is “cheap”- at least relative to where some stocks traded during the dot.com bubble.

http://www.zerohedge.com/news/2013-11-05/tuesday-tragedy-qe-will-continue-until-morale-improves

Tuesday Tragedy: "QE Will Continue Until Morale Improves"

Submitted by Tyler Durden on 11/05/2013 16:57 -0500

• New Normal

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When almost a year ago, we proclaimed the New Normal S&P abbreviation to stand forStalingrad and Propaganda (or, alternatively, Poorski), little did we know just how far the references to Yosif Vissarionovich would stretch. Today, courtesy of the Fed's Eric Rosengren and the Boston Business Journal, we find just how deep the Marriner Eccles' Politburo fascination with its central planning idol, Iosif Vissarionovich, truly runs.

And we certainly wish we were making this stuff up.

Via the Boston Business Journal:

http://www.zerohedge.com/news/2013-11-05/guest-post-why-fed-likely-wont-taper-long-anytime-soon

Guest Post: Why The Fed Likely Won't Taper (For Long)... Anytime Soon

Submitted by Tyler Durden on 11/05/2013 13:52 -0500

• Ben Bernanke
 
• Ben Bernanke
 
• Consumer Confidence
 
• Debt Ceiling
 
• default
 
• Deutsche Bank
 
• Excess Reserves
 
• Federal Reserve
 
• Goldman Sachs
 
• goldman sachs
 
• Gross Domestic Product
 
• Guest Post
 
• Janet Yellen
 
• Japan
 
• Larry Summers
• Monetary Policy
 
• Output Gap
 
• Personal Consumption
• Real estate
 
• Reality
 
• Recession
 
• recovery
• Unemployment

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Submitted by Lance Roberts of STA Wealth Management,

As the S&P 500 continues to push to one new high after the next, the bullish arguments of valuation have quietly given way to "it's all about the Fed."  The biggest angst that weighs on professional, and retail investors alike, are not deteriorating economic strength, weak revenue growth or concerns over the next political drama - but rather when will the Fed pull its support from the financial markets. 

Deutsche Bank's Peter Hooper, states that he isn't sure when the Federal Reserve will begin to taper its stimulative, $85 billion monthly purchases of Treasury and mortgage securities.  He assigns equal odds for each month.

However, while Peter's arguments are just as good as any, I have a slightly different view.

First of all, I find it highly unlikely that the Fed will taper its purchases in December as the government once again begins to debate over raising the debt ceiling.  As I stated in "The Real Reason For No Taper," following the surprise decision this past September:

"The problem the Federal Reserve currently faces is that they are once again facing an issue that nearly cratered the markets, and the economy, back in 2011.  As we quickly approach the limit of the government's borrowing capability, the threat of a government shutdown and 'debt ceiling' debate once again looms.  Bernanke is currently fearful of such a repeat event given an already weak economy coupled with rising interest rates.  Any shutdown of the government, fear of "default" or restrictive fiscal policies could collapse what incremental recovery there has been to date.

Therefore, at least for now, the clearest path for the Federal Reserve was to risk the building of an asset bubble, which they feel that they can control the deflation of, versus an economic drag that pulls the economy back into a recession.  Unfortunately, there is absolutely no historical evidence that the Fed can control the deflation of an asset bubble"

The bill that was signed this past October to end the government shutdown effectively gave control of the "debt ceiling" to the President.  Therefore, it is unlikely that the upcoming debate in January will be nearly as exciting as the last.  However, there is likely to be a fight over fiscal policy changes which could rattle the markets nonetheless.  Therefore, the Federal Reserve is unlikely to reduce its accommodative monetary policies, with an already weak economic environment, ahead of an upcoming battle in Washington that could lead to potentially restrictive fiscal policy outcome.

Furthermore, it is very interesting to note that a wide variety of analysts and economists sincerely believe for a third year running, that economic growth will accelerate in coming months.  However, there is no evidence of such an acceleration currently in the economic data.  In fact, much of the economic data points to an economic environment that is actually decelerating.  The ongoing effects of higher payroll taxes, and most importantly higher healthcare costs due to the onset of the Affordable Care Act, will continue to reduce the net disposable income of consumers which make up 2/3rds of economic growth.  I discussed this recently in regards to retail sales stating:

"However, there is one dynamic that has yet to fall into most analysts radars - the impact of the Affordable Care Act.  With the new revelation that as many as 14 million healthcare plans will be cancelled; the number of individuals having to pay more for healthcare is increasing. 

What does this have to do with retail sales?  Just about everything.  The chart below compares the level of retail sales to personal incomes.  See the correlation?

Those incomes are not rising.  If we substract an additional $200-300 per month for the additional cost of governmental healthcare - where does the money come from?

The problem for the average American is that their income is very finite.  According to a recentCNN Money survey roughly three-fourths of all American's are already living paycheck to paycheck.  Of course, this should not be surprising with roughly 90% of the population earning less than $50,000 on average.

That increase in the cost of healthcare, combined with the increased taxes from the ACA itself, will have a negative impact on both retail sales and the more comprehensive personal consumption expenditures report which feeds directly into the GDP calculation."

So, why not March?

A March taper is also unlikely as the Federal Reserve will be dealing with two primary issues at that point.  The first will be evaluating the impact of whatever deal was struck in Washington during the January/February debt ceiling-budget debate.  Secondly, will be the upcoming transition of control at the Federal Reserve from Ben Bernanke to Janet Yellen.  Considering that Yellen is potentially even more dovish that Bernanke in terms of monetary policy it is highly likely that the Fed will opt to leave current policy in place during the transition process.

On the economic front, it is unlikely that the labor market will have improved enough by March, or potentially worsened, to warrant reducing the current program.  It is not lost on the Fed that the majority of the decline in the unemployment rate has been driven by declines in the "labor force" participation rate.  Achieving a target of 6.5% unemployment would be a hollow victory, economically speaking, when a large percentage of the working age population is effectively not counted and living on welfare. (Currently 49.2% of all working age Americansare currently participating in some form of government assistance.)

Importantly, William Wascher and David Wilcox just recently released a new paper discussing evidence of the significant deterioration of the supply-side economic performance in the U.S.  The implications are important as it points to continued "very slow" potential GDP growth and an increase in structural unemployment. 

(Via ZeroHedge) "They estimate that real potential GDP growth has only averaged 1.3% since 2007, the output gap is currently about 3% of GDP, and the structural unemployment rate had risen to 5.75% by 2012 (although it is now again on a slight downward trend). They then use a modified version of FRB/US with an added role for "hysteresis" in labor markets--that is, a gradual transformation of cyclical unemployment into structural unemployment and/or labor force withdrawal --to analyze the sources of this deterioration, using a simulation in which the model economy is hit by a major financial crisis that is calibrated to match the size of the 2007-2009 episode. In a nutshell, they find that the post-crisis period 'features a noticeable deterioration in the economy's productive capacity' and that about 80% of the deterioration '…represents an endogenous response to the persistently weak state of aggregate demand.'"

Furthermore, falling levels of already low inflation rates suggest that the economy is slowing rather than expanding, housing is slowing as the run of speculation is ending with higher interest rates, and the markets have already shown a nasty response to "taper talk"previously.

Not Until The End Of 2014 - If Ever

As I discussed recently in "What Is A Liquidity Trap And Why Is Bernanke Caught In It?" the problem for the Federal Reserve is that when they attempt to reduce liquidity support from the markets, as they did in 2010 and 2011, it immediately results in a selloff in financial markets, a loss of consumer confidence and a downturn in economic growth.  Even talk of"tapering" earlier this year had similar consequences. 

Goldman Sachs had three very important takeaways:

"First, the studies suggest that some of the most senior Fed staffers see strong arguments for a significantly greater amount of monetary stimulus than implied by either a Taylor rule or the current 6.5%/2.5% threshold guidance.

Second, the studies provide two complementary reasons for why additional easing is warranted, and;

Third, the studies suggest that the most likely form of this additional easing would be a reduction in the 6.5% unemployment threshold."

While Goldman thinks that such an analysis implies a "taper" in March, alongside a reduction in the Fed's unemployment target to 6.0%, the reality is that it more likely infers that there will be the talk of more, rather than less, accommodative monetary policy particularly as Yellen takes control.  This will particularly be the case if I am correct about the impact of the Affordable Care Act on the economy in the months ahead.  (The full impact of ACA will not be felt until 2015 when the corporate mandate engages.  This will cause a significant transference of costs to the individual without an offsetting increase in wages.)  

As I stated previously:

"The lack of transmission of the current monetary interventions into the real economy has remained a conundrum for the Federal Reserve as the gap between improving economic statistics and the real underlying economic fabric continues to widen.  As Larry states, we are indeed in uncharted territory.  With the direct manipulation of interest rates near impossible, it leaves only verbal (forward guidance) and liquidity (increases of excess reserves) policy tools available.  The problem is that these tools have never been used to such a massive extent before in history.  While analysts and economist continue to suggest, with each passing year, that stronger economic growth is coming; it has yet to be the case.  As discussed previously, this is a tell-tale sign of a liquidity trap.

My belief all along has been and remains that a well thought out combination of both fiscal and monetary policy is the correct remedy for what ails the U.S. economy currently.  However, up to this point, the Fed has been the 'only game in town' to quote the famous words of Senator Chuck Schumer.   I have to admit that I was pleasantly surprised by Larry Summers view point as I believe that it is the correct one at this late stage of the current economic recovery cycle."

For the Federal Reserve, they are now caught in the same "liquidity trap" that has been the history of Japan for the last three decades.  With an aging demographic, which will continue to strain the financial system, increasing levels of indebtedness, and poor fiscal policy to combat the issues restraining economic growth, it is unlikely that continued monetary interventions will do anything other than simply foster the next boom/bust cycle in financial assets.

Should we have an expectation that the same monetary policies employed by Japan will have a different outcome in the U.S?  More importantly, this is no longer a domestic question - but rather a global one since every major central bank is now engaged in a coordinated infusion of liquidity.  The problem is that despite the inflation of asset prices, and suppression of interest rates, on a global scale there is scant evidence that the massive infusions are doing anything other that fueling the next asset bubbles in real estate and financial markets.  The Federal Reserve is currently betting on a "one trick pony" that by increasing the "wealth effect" it will ultimately lead to a return of consumer confidence and a fostering of economic growth?  Currently, there is little real evidence of success. 

Will the Federal Reserve "taper" in December or March - it's possible.  However, the revulsion by the markets, combined with the deterioration of economic growth, will likely lead to a quick reversal of any such a decision.