"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, April 1, 2011

Federal Reserve Confusion? - I don't think so

Remarks from analysts this morning about Federal Reserve Bank of New York President William Dudley's dovish comments on the state of the US economy mostly miss the mark in my view.

Dudley's words stood out in stark contrast to those by other Fed officials last week and this week who have been sounding a hawkish tone and chattering about ending QE. To paraphrase some of his comments: The US economic recovery is 'still tenuous' and 'far from the mark' of the Central Bank's goals of full employment and price stability, according to a report carried by Bloomberg this AM.

Dudley remarked that we must not be overly optimistic about the growth outlook".

Almost as if on cue, the bond market sharply reversed course after selling off this morning on the payrolls number. The Dollar simultaneously began slipping off its session highs.

Analysts were quick to chime in stating that the comments reflect the confusion and lack of consensus within the Fed. I do not think so to be perfectly honest for the reason that I have stated previously here at this site.

If the Fed starts sounding hawkish in an attempt to keep the Dollar from collapsing through a major chart support level near 75 on the USDX, they cannot prevent the long bond from breaking down technically and thus commence a rise in long term interest rates which will bury what might be any signs of life in the comatose housing market.

If they sound too dovish then the Dollar will come under renewed selling pressure potentially setting up a serious move lower in the greenback as it remains sitting perilously just above technical price chart support.

The Fed is attempting to keep both the Dollar from collapsing lower (they do want a sustained and gradual move lower - not a crash) and the long bond from collapsing. This is the reason for the conflicting signals being put out.

The idea is to keep enough confusion and uncertainty in the market to prevent speculators from getting too aggressive either way. Once the specs become convinced the Fed might move to end QE, the bond market will be massacred.
If the market becomes convinced that the Fed will not only keep QE2 going but engage in a QE3, then the Dollar will be obliterated.

The Fed created its own box and now they can deal with it. One thing is certain - they are not going to be able to have their cake and eat it too. What they will eventually have to come to grips with is that they are going to either have to sacrifice the Dollar or sacrifice the long bond.


  1. Dan,

    You've summed up the Fed's catch 22 nicely...
    "If the Fed starts sounding hawkish in an attempt to keep the Dollar from collapsing through a major chart support level near 75 on the USDX, they cannot prevent the long bond from breaking down technically and thus commence a rise in long term interest rates which will bury what might be any signs of life in the comatose housing market."

    You don't need to know anything other than this...

  2. Jim Sinclair's comment on March 30 over at jsmineset.com seems very similar:

    "The financial system is screwed up beyond any repair. On top of that there is no desire to repair anything because the wise guys know it is impossible. It is the world that the flushing of Lehman Bros. has created. It is not a brave new world. It is more like an audition for a world of Mad Max and the Day After.

    It does not matter whether or not there is more QE. The damage is done and there is no solution."

  3. Is it finally time to buy TBT???

    I've been in and out a couple of time waiting for the real show.

    Luckily, out of munis over the course of the last year...holding only one muni and one treasury, coming due Sept/July respectively...

  4. Sorry, misread something...looks like TBT will still be in a trading range and the big collapse is a ways off.

    Regardless, glad I'm out of NM muni bonds...One was a hard sell, not a big market out here!

  5. Excellent lay down, Dan. Thanks.

    That's what those Fed Boyz are doing,
    no fooling!

  6. Dan – here are three paragraphs from today’s daily “lunch with Dave” report from Gluskin Sheff’s David Rosenberg...

    I have no doubt that the commentary from most research departments will be
    supremely bullish. And there is no sense quibbling with the veracity of the data —
    employment has improved, it is a question mark as to whether it will continue to
    improve going forward. Suffice it to say that the improvement is not sufficient as
    of yet to generate organic income growth, primarily for the two reasons cited
    above, and at a time when fiscal policy is swinging from stimulus to restraint, all
    I see are clouds on the horizon as far as the outlook for consumer discretionary
    spending is concerned.

    Moreover, there is a very long row to hoe for the labour market — let’s not forget
    that it is still digging itself out of a very deep hole. For example, at 130.738
    million, payrolls are actually lower now than they were in January 2000. Think
    about that for a second — because over this 11 year period of flat employment,
    the population has risen nearly 30 million. The level of payrolls is also much
    closer to the bottom than it is to the peak ― in fact, here we are heading into
    year number three of the expansion and only 17% of the job losses have been
    recouped. (On average, 21 months after a recession ends, total nonfarm
    payrolls recover 207% of the jobs lost from the recession. There was one
    exception and that was the 2001 recession, where payrolls didn’t reach the
    bottom until 21 months after the recession ended in November 2001).

    At this stage of the cycle, what is “normal” is that we are at a new all-time high
    on employment! But payrolls are actually 7.25 million shy of where they were
    when the recession began, so the fact that they have rebounded 1.5 million
    from the lows is, in the overall scheme of things, really nothing to write home
    about. Here we are, just three months away from closing the books on the
    second year of a statistical stimulus-led recovery, and employment is still much
    closer to the trough than to the peak. If we can luck out and have the business
    cycle die and escape a recession at some point and continue along the path of
    200k payroll gains month in and month out, then we can look forward to the
    spring of 2014 before all the losses from the Great Recession are fully reversed.
    In other words, let’s hold off on the cheerleading and take umbrage in the fact
    that the labour market, while on the mend, is still a very sick puppy.

  7. Thank you Dan. Again, you help us to see through the BS and focus on the core issue.


Note: Only a member of this blog may post a comment.