Saturday, May 11, 2013

Bernanke Takes a “Leak”


How about Bernanke’s communication policy? The most important development for monetary policy in the last four years comes from a planted story in the Wall Street Journal on a Friday night. While I’m not surprised, I’m still disgusted. Press leaks to favorite journalists are no way to run this show.




The WSJ/Hilsenrath article confirms that the Fed is in the process of changing course on it’s QE policy. America has reached “Peak QE”, from now on it will be downhill for this policy. May will probably be the last month where $85B of securities are sucked out of the market.

The Fed’s new plan is to taper off QE over the balance of the year. Unlike the endings of QE1 & 2 the sunset for QE3 will be a bit of a surprise for markets. The stated intention (according to Hilsenrath) is to change the amounts of POMO purchases on a month to month basis. Reading through the lines, I get the impression that Bernanke is going to lower the QE buys one month, but should the markets react negatively, he would increase the purchases the following month in an effort to “rebuild confidence”.

I don’t see this new policy working at all. It’s the predictability of POMO that gives QE it’s market clout. When the predictability is replaced with uncertainty, the markets will not like it. What I find particularly galling is that the Fed believes that it can micro manage US (and global) capital markets. The Fed thinks it can reduce QE one month, but if markets swoon as a result it will just turn around and ratchet up the buying the following month. By doing so, the Fed can manage the markets. I say, “Not a chance”.


The market’s reaction to the Fed’s change in policy will be interesting to observe. I expect that there will be some weakness in equities next week. There should be some back-up in rates across the curve, and I think the dollar will move higher (especially the Yen). But I don’t see a blowup in the markets. The “Bernanke Put” is still alive for the time being.

The timing of the change in policy is interesting. Bernanke is no dope, he knows what the bond market is facing over the next five months, he knows that the bond calendar is very favorable for a wind-down of QE.

In two weeks the debt limit will be reached. After that date there will be a big reduction of new Treasury debt issued. Under normal conditions, the Treasury would have about $200b of wiggle room on the debt limit before there is a crisis. But in the summer and fall of 2013 the Treasury will reap an additional $60b of revenue from (incredibly) Fannie and Freddie. Based on this, I think the debt limit will not be a problem until sometime in October. So the reality is that over the next six months or so, there will be a shortage of new issue Treasury paper. This fact gives Bernanke the opportunity to reduce QE without a a big sell off in the bond market.

Then there is ZIRP. This policy will continue for a long time yet. The fact that the near-end is pegged at zero means that the long-end can’t get out of control. And finally, there is the inflation outlook – this looks to be tame for the next few months.

The ten-year may back-up to above 2% (currently 1.90%), but I don’t see 2.5% coming at at anytime in the immediate future. Towards the end of the year, when the debt limit is increased (it will be) there will be a flood of new issue paper and QE will be a non factor. That’s when the bond guys will be looking at supply and demand, and running for cover.


There is one element of this that gets a chuckle from me. Last week, two hedge fund guys, Stan Druckenmiller and Paul Singer made comments about the risks of QE and the distortions the policy creates. Paul Krugman jumped all over the hedge fund types who appose more QE in a series of blog posts. (Link and Link)

PK did his best to discredit Druckenmiller and Singer. PK said that those who appose Bernanke are just a bunch of stinkers who are short bonds and want to make money. PK’s rant is pretty amusing, he even takes a shot at gold investors. The final line of one of the posts was interesting. PK was attempting to highlight the “greed factor” that he thought was the real reason behind money managers opposition to continuing QE. In his usual snarky way, PK attempted to convince his readers that Bernanke Bashers had to have evil intent, that or they were gay, or suffered child abuse. I thought this line was obnoxious:


So anyway, the phenomenon of Bernanke rage is interesting. It probably has something to do with sexual orientation or childhood trauma, right?


My message to Krugman:

The WSJ article today was planted by Bernanke, and approved by Yellen. Clearly, these two also see that QE is a policy that has high risk and marginal returns. The article confirms what Druckenmiller and Singer were saying. They were right – you were wrong. Do you have the integrity to admit that? Or are you going to suggest that Bernanke also has sexual orientation issues, or suffers from childhood abuse?  If an elected official had used these words (even as a nasty joke) they would be called on the carpet.





  1. “Or are you going to suggest that Bernanke also has sexual orientation issues, or suffers from childhood abuse?”

    I think Ben indeed has sexual orientation issues. He’s got “cross dresser” written all over his smug face.

  2. The “sexual orientation” reference is to a comment historian Niall Ferguson made this week about Keynes. Ferguson and Krugman are mortal enemies. A few weeks further back, Ferguson publicly speculated that Krugman must have had a childhood trauma which causes him to be so obnoxious. Actually, I think they kind of deserve each other.


  3. Perhaps someone got the memo Thursday afternoon when the dollar spiked against everything while the yen breaking par was what mainly got noticed

    Regarding the greedy hedge fund types that just want to make money: Has there ever been a more beneficial policy than QE when it comes to institutional money making? It comes with announcements containing details of amounts, dates and a paper trail to follow ex post. When the QEs have stopped, it has been a good time to seek cover.

  4. hi Bruce – you think a pullback for the USD/Yen pair this week? or a continued leg up?

    I got confused around:

    “I think the dollar will move higher (especially the Yen)”

    as in “against the yen”?

    seems reasonable given the posturing of the central banks

  5. hi Bruce – you think a pullback for the USD/Yen pair this week? or a continued leg up?

    I got confused around:

    “I think the dollar will move higher (especially the Yen)”

    as in “against the yen”?

    thanks :)

  6. Reminds me of 2004 when Greenspan was heading out the door. Funds rate inched upward 25 basis point increments from the 1 percent basement. That was the beginning of the end of the real estate bubble.

    Bernanke wants to normalize policy before his term ends, who knows he might leave early. Why not let Yellen take the heat/blame/hot seat? After all, Bennie is the white knight that saved the US economy. He’s not going to save it a second time.

    Plus … the Fed is going to need some monetary ammo … the bulls are all over themselves there is a correction in the offing.

    • I don’t expect it to be a big pullback. At least not yet. The dollar is seen as the last safe place to put money so most money is coming to the US to be invested. Give it two or three years before we get the 2008 crisis again. It will be much worse because tax payer funds will not be used to bail out the banks, all bank funds will be MF Globaled.

  7. Bernanke: Out of credit, and more importantly out of credibility…

  8. BTW Bruce … following up on your missive about the low water levels in the Mississippi river a few months back, the mexicans are extra upset about the US mismanagement of the Colorado river (same problem, different river). Global warming was always a hoax. The water problem (same problem, lots of rivers) is the US government arrogantly thinks it can second guess Mother Nature

    Here is StratFor’s take on the Colorado river mess:
    >>>U.S., Mexico: The Decline of the Colorado River is republished with permission of Stratfor.

  9. BubbaJoe,

    So global warming is a hoax?
    You might want to figure out why we hit CO2 levels never see on earth….it must be worms mating..

    I like how some people who think they know about weather spout off like drizzle in Los Angeles….
    Next thing you will say is Global cooling is reality…

    • Yes, global warming was, is and always will be a hoax.

      As for your garbage Obama-like lies about CO2 levels the highest ever seen? Come on moron. Next you will be telling us it was caused by a youtube video.

      Quite sure that no one was measuring CO2 levels for the first 5-6 million years humans were on Earth — because cavemen did not have the equipment to do so. You are lying.

      Even more sure that the dinosaurs did not take time out from slaughtering each other or dodging meteors to measure CO2 levels … they did not have thumbs, never mind instruments to measure CO2 levels. Once again, you are making crap up to suit your political ends — and you have zero basis in fact.

      And global warming isn’t just about CO2 lies … you lying liberals are so arrogant that you want us to believe you can forecast the weather decades in advance? How about getting next week’s forecast correct before you start claiming God-like forecasting abilities?

      Liars and cheats with anti-American values is all you are.

      Now go be a good liberal and stick the IRS on your political opponents or lock-up some reporters for daring to challenge your claimed omniscience.

      • Are you really that obtuse, we have the ability to measure CO2 in ICE goofball…
        Obama,, liberal are you serious, republicans and democrats, same shit, 2 different piles
        You bought the carnard and play liberals and conservatives…one of many sheeple=Bubba Joe
        Liar and cheat- come visit me and see if your man enough to say it to my face..it will be hard with your face on the floor…go back to your mobile home and drink some whiskey


      • backwardsevolution says:

        Bubba Joe – Anti-American values (whatever the heck those are)? Someone disagrees with you and suddenly they’re anti-American? Might sound good to an IDIOT!

        Weather and historical temperatures have always been cyclical (volcanoes have decreased temperatures considerably in the past, as an example), but do we just clap our hands together and leave it at that? Wouldn’t it be prudent to ascertain how we might, with our current strip mining of everything that’s not nailed down, be helping things along considerably?

        Man will undo himself.

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  11. Co2 levels at the highest ever on earth? They have been much higher than today actually. We do know that CO2 levels are rising however, and that the earth has warmed. That is not Global Warming Theory however. Global Warming Theory is all over the shop, with the connection between CO2 levels and warming dubious at best, and the results from the supposed connection as close to wild guesses as you can get.

    But, just like the S&P to infinity mantra today, when everyone’s on board and it’s moving upward, everything proves it…

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