The market's response to Wednesday's Fed policy statement and subsequent press conference by Bennie “The Bong Master” Bernanke suggests that confidence in the Central Bank is waning.
Bennie freely admitted that the Central Bank, after the completion of the $267 billion Twist 2 at the end of this year, would be out of ammunition as far as maturities extensions go. Quoting from the New York Fed, who will be implementing the sale of short maturities and purchase of longer dated treasuries:
So that's one less form of monetary dope that Bennie will be peddling. Frighteningly for investors, Bernanke thinks he has other weapons at his disposal that can save the economy, but I believe he is completely out of touch, and cash may be the best play available if you can't short the market.
I Think I'm Turning Japanese
During the press conference, which is always the most entertaining part of the circus, a Japanese reporter, whose name I did not catch, questioned the chairman as to whether or not he felt he was essentially creating a liquidity trap. That's a situation where Central Bank monetary injections fail to have the desired effect of stimulating the economy. Bennie replied:
Apparently, the work he did for the Bank of Japan did not include the evaluation of the effectiveness of such measures. Over the last decade and change, Japan's central bank has not only purchased its own treasuries, but expanded the accommodative policies to include purchases of ETFs on the Japanese stock market as well as real estate investment trusts (REITs). The results have mired the country in a no-growth, deflationary spiral, and few would argue with that.
I'm not sure how anyone could possibly characterize that as effective policy, unless they are completely inebriated.
The Money is Where?
A few minutes later, another reporter gave Bernanke the opportunity to confirm the fact that his over reliance on monetary theory has clouded his vision. The question related to whether or not Operation Twist and other forms of quantitative easing will have a continued negative impact on bank earnings and, as a result, impede the ability of consumers to get credit from said banks. At first, he even seemed a little confused by the question...
There are so many things wrong with this answer, but I will try and keep it brief. According to the St. Louis Federal Reserve, since the announcement of the first round of quantitative easing was announced in August of 2008, commercial and industrial loans are down 10%. Now it is true that this is up from the lows set in October of 2010 when business lending was off 21% from the announcement of QE, but banks are clearly not actively searching to make new loans.
Banks make risky bets with excess cash. Jamie Dimon said as much during his recent testimony on Capitol Hill. Banks are looking for higher returns, but they are not looking for the measly few percentage points they can get by putting the money to work in the economy by making loans. They are swinging for the fences and double-digit returns through speculation in obscure derivatives.
Pack Another One, Bennie!
Wednesday's press conference was, in my opinion, a stark confirmation of two big negatives for the economy and the markets:
1) The Fed is out of ammo unless it resorts to Japanese style asset purchases and no, Mr. Chairman, that will not stimulate the economy.
2) Bernanke is completely lost in monetary theory and does not understand what is really going on in the banking system he is supposed to oversee.
Both of these issues mean that, if you can't short the market, cash is a great play until central bankers step away from the dope. Sadly, much more damage could be done before that happens.
Price Shock Trader