Bond Vigilantes Are Punks

Charles Payne
Posted: Sep 16, 2012 12:01 AM
Watching Ben Bernanke on 60 Minutes and other interviews including his question & answer session on key Fed decision days, I got the impression his top goal was one I'd seen a lot growing up in New York - I ain't no punk!

Of course, on the streets of New York or in the corridors of the Federal Reserve it takes more than tough talk and swagger, occasionally you have to show and prove.

Yesterday, Ben Bernanke came ready to prove and he did, with an economic version of the vigilante. The Fed is opening the spigots and saying they'll turn them off when they are good and ready. The result was a giant spike in stocks, gold, and silver while the dollar took it on the chin.

This Charles Bronson act is playing well with people that manage money because it's clear the Fed is ready to take on the laws of economics, history and, some would say, common sense to achieve its goals. One could argue the money isn't going directly into those assets, so this is misplaced enthusiasm. But it is a lot of money gushing around the system, and at some point it will seep out into Main Street. The thing is, many wonder if this action is a sign of desperation or the ultimate death wish.

Does the Fed Matter?

Since late 2008 the Federal Reserve has embarked on a series of actions, from traditional rate cuts to what's known as Quantitative Easing, which involves the purchase of assets from commercial banks and institutions like Fannie Mae and Freddie Mac. Now the Fed will begin buying $40.0 billion in mortgage backed securities each month until further notice, and will reinvest $45.0 billion in interest payments. In addition, low rates are being pushed to mid 2015 from late 2014. The question is, has the Fed lost its magic to affect the jobs market and is it pushing so hard that once the inflation dam breaks, we all drown?

Extraordinary Action


* Began November 25, 2008, with an initial purchase of $500 billion in mortgage backed securities but added on purchases from Fannie Mae, Freddie Mac, and Federal Home Loan banks.
* In March 2009, the Fed upped its buying to an extra $750 billion in mortgage backed securities.
* The program ended March 31, 2010, with the Fed having purchased $1.25 trillion of mortgage backed securities and $175 billion in agency backed securities.


* This program began November 3, 2010, with the Fed buying bonds to the tune of $600.0 billion with measured purchases.
* This program ended June 30, 2011.

What are the banks doing with the money?

Many banks argue there is no demand for loans or that standards have become very rigid since the Great Recession began. But, the Fed's survey of senior loan officers seems to belie this notion. There has been a reversal of demand for loans for primary residence since the month before QE1 began to the most recent survey. Current demand for mortgages on primary residence is up significantly, an exact reversal from October 2008. Yet, banks admit willingness is increasing at a far slower pace (see tables).

Bank stocks aren't faring well since QE programs began (the secret $13.0 trillion in loans and TARP).

The pay is great again, with the top four executives at Citigroup (not including Pandit) earning $42.0 million in 2010 and Pandit's pay, which was rejected by shareholders, rebounded to $15.0 million last year. But the shares of this and other large commercials banks haven't done much since rebounding from March 2009 lows, due in part to a seldom talked about accounting change that immediately created profits and healthy balance sheets.

* C was $82.90 (split adjusted) now $34.10
* BAC was $16.25 now $9.31

There is the notion of a wealth effect that could kick into gear, although it's unlikely unless the Dow reaches 15,000, and there is job growth, and quite frankly if there is a new president. Maybe then that elusive virtuous cycle begins where things are better, so people spend and companies hire, which makes things better so people spend and companies hire. Home values are coming off lows and rates are dirt cheap so this action will have limited impact on housing that would have otherwise been there.

For now, I think the risks outweigh the rewards of Fed actions, but I'll take stock market gains and remind everyone to be careful and don't drink the Kool-Aid, even if it looks so sweet coming from the Fed's golden cup.

Fed Conclusion

I don't think Ben Bernanke made such a massive gamble simply only to keep President Obama in office. In fact, QE3 is an indictment against the administration as it screams to the world that fiscal policies are not working and that the nation is in so much more trouble than anyone knows. Remember that this is the same Bernanke who dragged his feet at the beginning of the fiscal crisis. He was cautious to a huge fault. I don't hear much bragging about it anymore by politicians, but "jump starting" the economy is what the Fed is trying to do. Not only have they filled the gas tank with high octane rocket fuel Ben poured it all over the ride as well. He's going to set this baby on fire!

This week Moody's talked about lowering the nation's debt rating, and yesterday the Fed went bananas ... none of this would happen if the economy were firing on all cylinders.

For the market the bias remains to the upside, with pitfalls future news that underscores why the Fed took this action, and yet even that could be mitigated with low expectations. Speaking of which, this morning's CPI numbers give the Fed cover as they point to a benign inflationary environment from the government's point of view while core retail sales actually missed. In fact, not only are core retail sales of 0.1%, well below consensus of 0.4%, but prior month results for headline and core were revised lower (this is the most amazing coincidence; just about all the economic data we get each month is later revised lower).