Tag: federal reserve

Bernanke calls for more sustainable fiscal policies

Posted by WFG – October 4, 2011

Bernanke calls for more sustainable fiscal policies in his testimony to the congress today. The market was down most of the day and rallied high in the last half hour of trading.Europe stays as the focus as the ECB will announce their monetary policy on Thursday.

 

The US economy

  • US factory orders -0.2% August
  • Redbook chain store sales +4.1% (weekly)
  • ICSC retail store sales +0.1% (weekly)

The data reported today are mostly flat and does not provide much support to the market. A big news today is Bernanke’s testimony to the congress:

Bernanke calls for more sustainable fiscal policies

In his speech to congress Joint economic committee today, most news sources reported positive comments by Bernanke in regards to more monetary stimulus. After review of the speech we believe that he is more focused on fiscal outcomes and that the fed cannot repair uncertainties caused by inappropriate government policy. Therefore do not expect the feds monetary policy to be as large or as effective as in the past.

”
Another factor likely to weigh on the U.S. recovery is the increasing drag being exerted by the government sector. Notably, state and local governments continue to tighten their belts by cutting spending and employment in the face of ongoing budgetary pressures, while the future course of federal fiscal policies remains quite uncertain.

To be sure, fiscal policymakers face a complex situation. I would submit that, in setting tax and spending policies for now and the future, policymakers should consider at least four key objectives. One crucial objective is to achieve long-run fiscal sustainability. The federal budget is clearly not on a sustainable path at present. The Joint Select Committee on Deficit Reduction, formed as part of the Budget Control Act, is charged with achieving $1.5 trillion in additional deficit reduction over the next 10 years on top of the spending caps enacted this summer. Accomplishing that goal  ould be a substantial step; however, more will be needed to achieve fiscal sustainability.

A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery. These first two objectives are certainly not incompatible, as putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term. Third, fiscal policy should aim to promote long-term growth and economic opportunity. As a nation, we need to  hink carefully about how federal spending priorities and the design of the tax code affect the productivity and vitality of our economy in the longer term. Fourth, there is evident need to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy. In sum, the nation faces difficult and fundamental fiscal choices, which cannot be safely or  esponsibly postponed.

But states that inflation isn’t a problem:  We note that he is trying to shift attention away from the feds previous actions causing the commodity inflation we saw over the last year. But the markets think differently and therefore  expansion of the fed’s balance sheet is to be frowned upon.

“Returning to the discussion of the economic outlook, let me turn now to the prospects for inflation. Prices of many commodities, notably oil, increased sharply earlier this year, as I noted, leading to higher retail gasoline and food prices. In addition, producers of other goods and services were able to pass through some of their higher input costs to their customers. Separately, the global supply disruptions associated with the disaster in Japan put upward pressure on prices of motor vehicles. As a result of these influences, inflation picked up during the first half of this year; over that period, the price index for personal consumption expenditures rose at an annual rate of about 3-1/2 percent, compared with an average of less than 1-1/2 percent over the preceding two years.

As the FOMC anticipated, however, inflation has begun to moderate as these transitory  influences wane. In particular, the prices of oil and many other commodities have either leveled off or have come down from their highs, and the step-up in automobile production has started to reduce pressures on the prices of cars and light trucks. Importantly, the higher rate of inflation experienced so far this year does not appear to have become ingrained in the economy. Longer-term inflation expectations have remained stable according to surveys of households and economic forecasters, and the five-year-forward measure of inflation compensation derived from yields on nominal and inflation-protected Treasury securities suggests that inflation expectations among investors may have moved lower recently. In addition to the stability of longer-term inflation expectations, the substantial amount of resource slack in U.S. labor and product markets should continue to restrain inflationary pressures. “

But his conclusion address the future:

 ”Monetary policy can be a powerful tool, but it is not a panacea for the problems
currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector. Fiscal policy is of critical importance, as I have noted today, but a wide range of other policies–pertaining to labor markets, housing, trade, taxation, and regulation, for example–also have important roles to play. For our part, we at the Federal Reserve will continue to work to help create an environment that provides the greatest possible economic opportunity for all Americans”

 

The bottom line

This week looks like a trading week: The global markets are trading lower due to the lack of any monthly support. News continues to be disappointing and uncertainty is paramount. Therefore traders will test support and resistance levels until news of relevance materializes.

 

Corporate earnings releases coming up

Earning are expected to be poor, but have already been revised. More importantly will be the outlook. An interesting note would be during the second week of October in 2008 when the earnings came out, the market dropped tremendously.

 

Europe: Trichet talks about easing

Trichet has been very outspoken on his stance for monetary easing, and since inflation numbers were higher than expected last week, and because the problems in Europe are more political, he is not expected to ease policy. The ECB has already made a statement to provide liquidity as necessary to the markets. The ECB meeting will be held on Thursday and new monetary policy, if any, will be announced.

In his speech this year to the parliament, he pointed out

We expect real GDP growth in the euro area to be very moderate in the second half of this year

The risks to the economic outlook, which previously were balanced, are now on the downside.

…monetary expansion remains moderate. Liquidity accumulated prior to the period of financial market tensions continues to be ample but recent data indicate that part of it may be held more for precautionary reasons than for spending.

The risks to the medium-term outlook for inflation were broadly balanced in the eyes of the Governing Council in its last meeting, whereas before they were seen as being on the upside.

On economic governance, there is no doubt that you will make extensive use of tools such as the ‘economic dialogue’ to support economic integration with the required legitimacy. This will open up the process of fiscal and macroeconomic surveillance and, by enhancing transparency, it should encourage Member States to abide by the new rules as strictly as possible

am also confident that, both in the financial supervisory and governance package, you will seize the opportunity of the review clause to go one step further. In 2013 and 2014, you will have a rendez-vous with the Council to take stock and explore possible improvements. This will once again be an occasion to bring forward European integration in key policy areas.

When the Commission put forward the financial supervisory package, the Parliament did its utmost to strengthen the powers of the new supervisory authorities. Here again, you could also count on the support of the ECB.

In my personal view, Europe will need to make significant progress towards political unity with an executive branch and a Parliament, both with extended responsibilities as in any democracy. Part of this executive branch would be a European finance ministry which will be responsible, not necessarily for a large federal budget, but certainly for a strong economic and fiscal surveillance and governance, for the handling of the financial sector and for the external representation of the Economic and Monetary Union.

 

Canada: Loonie price volatile, market still not showing good sign

The Canadian stock market although rallied together with the US market at the end of the day, still have not recovered from the losses in the previous trading day.

The stock market today

Todays end of day rally amplifies the day traders need to cover positions at the end of the day. The markets closed near resistance and we will see if the break to the upside tomorrow.

 

Valuations still look high if the economy is softening. We still believe we are not finished seeing the new lows for the year. The only thing we can say for certain is that We are closer to the bottom than we were in July.

Unemployment Concerns Continue

Posted by WFG – September 2, 2011

TSX – 12,700.74

Dow – 11,493.57

S&P 500 – 1,204.42

Nasdaq – 2,546.04

Unemployment Concerns as New Figures are Released

  • The new US employment figures showed no growth, staying at 9.1%, as no jobs were added to the American workforce.
  • Analysts had expected the US to create 75,000 new jobs, but the report revealed that this estimation was too high.
  • The news caused falls in the stock market and more panic as unemployment concerns continue. Read the rest of this article

Was the Bank Of America Investment Really a Warren Buffett Idea?

Posted by WFG – August 26, 2011

8/25/2011

Markets Close

TSX – 12,284.31

Dow Jones – 11,149.82

S&P 500 – 1,159.27

Nasdaq – 2,419.63

The Warren Buffett Investment?

  • The market was up at the open, this was on the news that Berkshire Hathaway invested in Bank of America.
  • This investment might have helped the lift confidence, but doesn’t seem like a normal Warren Buffett move. While it was suggested by the Peer to Peer Group that it could have been the actions of a stock manager. Key figures in the media also speculate that it could be an investment leaning towards a political favor.
  • Despite the conspiracies, Buffet has stated that the move was his idea and has ‘guaranteed profit’. Read the rest of this article

Eurobonds and the Federal Reserve

Posted by WFG – August 26, 2011

8/24/2011

TSX – 12,343.81

Dow Jones – 11,320.71

S&P 500 – 1,177.60

Nasdaq – 2,467.69

Gold and Mining

  • Gold took a big hit as their prices continue to fall. Despite the market’s rise, investors were cashing in on the metal as they awaited the Jackson Hole summit. Speculation is mixed on whether the Federal Reserve will signal an extra round of U.S monetary easing.
  • If the Federal Reserve does approve more quantitative easing then the chances are that gold prices will rise. If they don’t, then gold prices will fall. With the uncertainty many have decided to take no risks as gold already hit a peak in early august. Read the rest of this article

Dodd Frank: legislation, implementation and current situation

Posted by winflowfinancial – June 15, 2011

The full title of Dodd Frank is “Dodd-Frank Wall Street Reform and Consumer Protection Act”. It was passed and signed by President Obama on July 21, 2010. The purpose of this act is to advocate strict regulations in the financial market, thus to create a solid foundation for the modern economy. The specific goals of the act is to end further bailouts to “too big to fail” companies and prevent future financial crisis from happening.

The key points are:

  • Consumer Protections with Authority and Independence
  • Ends Too Big to Fail Bailouts
  • Advance Warning System
  • Transparency & Accountability for Exotic Instruments
  • Executive Compensation and Corporate Governance
  • Protects Investors
  • Enforces Regulations on the Books

The implementation has so far been controversal. The Fed were reluctant to release the name of banks who received help during the financial crisis. More problems on Dodd-Frank were reported in a Financial Times article in March. As it said:

it fails to capture the degree of global interconnectedness of recent decades  which has not been substantially altered by the crisis of 2008. The act may  create the largest regulatory-induced market distortion since America’s  ill-fated imposition of wage and price controls in 1971.

Last week it was reported that the new act has not been implemented in many aspects:

Ten months since President Barack Obama signed Dodd-Frank into law, regulators have missed all 26 deadlines supposed to be met by April.  According to ProPublica’s Jesse Eisinger and Jake Bernstein, “Dodd-Frank requires 387 different rules from 20 different regulatory agencies. The Byzantine, tedious rulemaking process has occasionally pitted regulator against regulator and proved a bonanza for lobbyists.”

And as a result, as reported yesterday, rules that were about to commence in July have to be postponed to a later date.

 

 

Inflation subdued, expectation anchored, said FOMC minutes

Posted by winflowfinancial – May 25, 2011

THE FED TRIES TO TEMPER MARKET INFLATION

The FOMC minutes of the meeting of April 26-27 reinforce the general ideas that  Chairman Bernanke spoke about at the press conference after the meeting.

Regarding the increased headline inflation, the FOMC addressed the existence, but “generally anticipated that the higher level of overall inflation would be transitory.” As recorded in the minutes,

A few of these participants thought that economic conditions might warrant action to raise the federal funds rate target or to sell assets in the SOMA portfolio later this year, but noted that even with such steps, monetary policy would remain accommodating for some time to come. Other participants indicated that underlying inflation remained subdued; that longer-term inflation expectations were likely to remain anchored, partly because modest changes in labor costs would constrain inflation trends; and that given the downside risks to economic growth, an early exit could unnecessarily damp the ongoing economic recovery.

WHAT IS INTERESTING IS HOW THE FED IS VIEWING INFLATION. They acknowledge that prices are going up, but are putting the emphasis on inflation expectations.  They mention monetary tightening but are still expanding the monetary base EVEN with increasing inflation pressures.  Quoted from the minutes:

While some measures of longer-term inflation expectations had risen, others were little changed or down, on net, since
March, and members agreed that longer-term inflation expectations had remained stable.

The officials recognized price increases in consumer products too. Quoted:

Many participants reported that an increasing number of business contacts expressed concerns about rising cost pressures and were intending, or already attempting, to pass on at least a portion of these higher costs to their customers in order to protect profit margins.

THIS REINFORCES THE DOVISH EXPECTATIONS OF THE FINANCIAL AND BUSINESS MARKETS and we should not expect the FED to tighten monetary policy in the near future.

THE FUTURE PROJECTIONS OF INFLATION BY THE FED

The minutes turned to talk about core inflation in the medium term, and said that’s subdued. However, in the projection chart given, the Fed predicted a possible over 3% headline inflation in the year of 2011.

 

IN CONCLUSION

The Fed will have to deal with inflation sooner or latter and the prudent approach of the intelligent investor would be to construct their investments accordingly. Giving that monetary policy is tightening, the long asset approach to investing is not to be relied upon and a more active investment style is required.

 

 

More on AIG, cut in holdings by treasury, tempted to aquire Maiden Lane II LLC

Posted by winflowfinancial – May 24, 2011

AIG: A GOVERNMENT CORPORATION

AIG has emerged to the news headlines recently for several issues. Our previous facts search on AIG was mainly on the purchase of mortgage backed assets by the Fed, namely the Maiden Lane II LLC.

During the financial crises of 2008, AIG became a US government owned corporation. As reported in the  WSJ, the government is taking actions selling a substantial part of the 1.655B shares of AIG.

It is further reported today that the US government and AIG sold $8.7B in shares today, that yield a small gain for the treasury.

 

THE FED AND MAIDEN LANE

In another report , the  WSJ stated that the Fed has been selling bonds backed by the asset acquired from AIG since the beginning of April. The original asset from AIG had a face value of $30B, and was bought for $21B, and now has a market value of $16B. AS of ?????date the Fed balance sheet records either $14.3B or $15B. This would mean a $6 billion loss.

AIG wants to repurchuse Maiden Lane

It is also reported in the article that AIG had around $21B cash in anticipation of buying the securities back from ML II LLC by the end of 2010, and had invested about 1/3 in other assets by end of March 2011.

WILL AIG PROFIT FROM THE PUBLIC COFFERS?

It is somewhat opaque what’s included in the assets sold to Maiden Lane II LLC and from AIG’s temptation of purchasing them back, it is quite possible that these assets have great potential of increases in value.

WHY SHOULD AIG purchase back these assets at the market value. It is AIG who created these toxic assets and the Fed saved them by purchasing these assets from them. AIG is a private company and the public should never be responsible for their mistakes. If AIG should purchase back these assets, it should be the original amount they received from the Fed, plus all applicable interests and costs of setting up Maiden Lane II LLC.

The result has been that AIG did not win the bond portfolio on a direct purchase bases, but has recorded a $744 million profit from their participation in Maiden Lane III.

IT WOULD SEEM THAT AIG PROFITED AT THE US PUBLIC EXPENSE

Independence of the Fed from government

Posted by winflowfinancial – May 23, 2011

SHOULD THE FED ANSWER MORE TO THE PEOPLE?

In the previous article we explained the structure of the Fed, and the seemingly fact that the decisions depend more on the board of governors, or the Chairman himself.

Here is an interesting opinion which attacked the Fed that not only it is dependent on Chairman Bernanke, it is dependent on the Congress.

Excerpts:

Because the Fed operated under a unanimity rule rather than a supermajority rule during this stretch, Fed-watchers have no way to determine whether there were internal dissents on such matters as the Bear Stearns merger, the purchase of troubled banks’ debt and the failure to merge Lehman Brothers into another institution.

Many in Congress have already said that they would rewrite the Federal Reserve Act and institute change if they could get the votes needed to do so.
As long as unemployment remains high and the likelihood of rapid and robust economic improvement is remote, Bernanke can expect that continued pressure will come from Congress.

The Structure of the Fed

Posted by winflowfinancial – May 5, 2011

Many people are confused about the structure of the Federal Reserve, or the relationships between the Fed Board of Governors in Washington, Federal Reserve Banks in each district and the Open Market Committee that always appear in the news whenever monetary policy is talked about.

The Federal Reserve System indeed has a two-part structure: the Board of Governors in Washington DC as the central authority that oversees the entire system, and 12 regional Federal Reserve Banks located in each Federal Reserve District of the country.

 
Board of Governors

The President of the United States selects 7 members for the Board which  the Senate must confirm, a member may not be elected again if he has served a entire full term of 14 years. The Board of Governors sets bank reserve requirements, a monetary policy tool that’s seldom used in the United States.

Reserve Banks

The 12 regional Federal Reserve Banks (FRB) are each a corporation on its own, whose shares are owned by commercial banks. All national chartered banksare required to purchase non-transferrable FRB shares. Directors and president of each Federal Reserve  Bank are elected by its shareholders. Directors are from the commercial banks, general public but not the congress. FRB’s generate their own income through services to commercial banks, but they do not operate for profit. All net earnings are returned to the US treasury each year. The Federal Reserve Banks do not make decisions directly on monetary policies.

Federal Open Market Committee (FOMC)

FOMC is the official monetary policymaking body. The FOMC consists of all Board of Governors, the president of New York Federal Reserve Bank, and presidents of 4 other regional Federal Reserve Banks, which rotate every year.

FOMC holds regular meetings 8 times each year, and additional meetings when necessary. All district FRB presidents attend the meetings, on which they discuss current economic conditions and give feedbacks from the financial system. Following the discussion, the FOMC members propose an action on monetary policy, and then cast a round of vote. Only the FOMC members have the right to vote and the rest of FRB presidents attend the meeting only for discussion.

Although described as democratic, the voting process is seldom against the action. The reasons are that, first, the action is presented following a series of discussion, thus should always represent the view of most attendees. Second, the Board of Governors makes the majority of the FOMC (7 of 12), and they are usually on the same side as the Chairman. Therefore a dissent vote or two from the FRB presidents usually does not affect the policy.

Fed Officials’ talks, hawkish vs dovish

Posted by winflowfinancial – May 4, 2011

Here is a compilation of comments make by officials of the Federal Reserve Banks.

As of today, only 2 of 10 voting members of FOMC have expressed hawkish comments.

Hawkish: 2 (Bullard, Hoenig and Lockhart are not voting this year)

Name Date FOMC
Voting		 Excerpt
Richard
Fisher		 Dallas Apr 8 Y “In my view, no amount of further accommodation by the Fed would be wise—either by prolonging or “tapering off” the volume of Purchases of Treasuries past June, or adding another tranche of large-scale asset purchases. Indeed, it may well be that we should consider curtailing what remains of QE2.”
James
Bullard		 St.
Louis		 Mar 28 N “The economy is looking pretty good, It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short,”
Charles
Plosser		 Philadelphia Apr 1 Y “A stronger rebound in the economy or inflation than some now expect
could require policy actions to be taken sooner and more aggressively than many observers seem to be anticipating. Allowing monetary policy to fall behind the curve can only result in greater inflation and more economic instability in the future.”
Thomas
Hoenig		 Kansas May 3 N “I can’t go anywhere in my district and have people not ask me about inflation” The Fed needs to “calm inflationary fears” by raising interest rates, and “if we don’t do that, then I think they will build over time,”
Dennis Lockhart Atlanta May 4 N “no further stimulus will be added, but I can’t speculate about what accommodations may be needed.”

Dovish: 6 (Rosengren is not voting this year)

Name Date FOMC Voting Excerpt
Ben Bernanke Board, Chairman Apr
27		 Y “Our expectation is that inflation will come down towards a more
normal level, but we will be watching that carefully and also watching inflation expectation, which, you know, which area important that they remain
well anchored if we are going to see inflation remain under good control.”
William Dudley New York, Vice Chairman Apr
11		 Y “We shouldn’t be enthusiastic about tightening monetary policy
too soon,”"If inflation expectations became unanchored, the Fed would have
to respond. I don’t see any signs that expectations are becoming
unanchored.”
Charles Evans Chicago Mar
28		 Y “…current measures of underlying inflation are subdued and are
running lower than what the FOMC judges to be consistent with long-run price stability. To be sure, we see some increase in headline inflation due to higher food and energy prices, but we do not expect these to materially boost underlying inflationary trends.”
Narayana Kocherlakota Minneapolis Apr
14

May 5

 Y “Core inflation is a much better signal of where inflation is going to go in the future. There’s really not much signs of inflationary pressures building up.”

“I believe that it  would be appropriate for the FOMC to raise the fed funds target interest rate  by a modest amount at the end of 2011″
Daniel Tarullo Board Apr 14 Y “And to this point at least, haven’t seen indications that the (higher) headline inflation, which … we are likely to see for at least a few more months…”
Janet Yellen Board Apr
11		 Y “I believe this accommodative policy stance is still appropriate
because unemployment remains elevated, longer-run inflation expectations remain well anchored, and measures of underlying inflation are somewhat low”
Eric Rosengren Boston May 4 N “The Fed’s policy stance, as you know, is currently very accommodative – a stance that I believe is appropriate given the tentative recovery and still-high unemployment.”

Unclear: 2

Name Date FOMC Voting Excerpt
Sarah Bloom Raskin Board Apr
7		 Y ” …we had successfully treated the worst symptoms of the illness… Now we must address the aftershocks of the subprime mortgage meltdown: dislocation, joblessness, and loss of confidence.”
Elizabeth Duke Board Apr
14Apr
28		 Y “A variety of recent survey results paints a picture of increasing optimism about future sales and business conditions and a corresponding easing of credit availability for small businesses.”“Foreclosed, vacant, and abandoned properties threaten neighborhoods nationwide.”