Failure to Communicate

March 20, 2014

  • Dammit, Janet! Whatever happened to “communications policy”?
  • Rising rates next year? A more likely outcome the Fed won’t talk about
  • Was the Ukraine crisis all about sabotaging Iran nuke talks?
  • How banking really works: If you didn’t believe Chris Mayer, how about the Bank of England?
  • The perils of hiding gold in a flowerpot… How gold might flow from the New York Fed to Russian vaults… acknowledging the downside of the U.S. energy boom… and more!

  If Janet Yellen were a movie, it would be Heaven’s Gate.

You know, the one with Kris Kristofferson? Huffington Post calls it a “costly mess, which is still synonymous with Hollywood hubris gone mad.” Made in 1980 for $44 million, it grossed only $3.4 million worldwide. It proved the demise of the United Artists studio.

Hey, who’s the new cast member?

  The reviews are in from Ms. Yellen’s debut in a leading role… and they are uniformly scathing.

“Janet Yellen stumbled in her first meeting as chairwoman of the U.S. Federal Reserve,” the Financial Times lambasted, “after sending signals that appear to point to earlier rises in interest rates.”

“Investors bristled,” chastised The Wall Street Journal, “after Janet Yellen emerged from her first meeting as Federal Reserve chairwoman with some unsettling signals about the central bank’s outlook for short-term interest rates.”

That’s the problem with high expectations. Director Michael Cimino was supposed to deliver another critically acclaimed hit after The Deer Hunter. And Ms. Yellen? She’s been the champion of “communications policy” — clearly telegraphing the Fed’s intentions to the market. She convinced her predecessor Ben Bernanke to start holding press conferences four times a year.

If you don’t mind us invoking one more movie analogy, it’s from the far more successful Cool Hand Luke: What we’ve got here is failure to communicate.

 The idea behind communications policy “is that over time, individuals will ‘get the message’ and begin to make borrowing, investment and spending decisions based on the promise of lower rates,” explains Currency Wars author Jim Rickards.

“This will then lead to increased aggregate demand, higher employment and stronger economic growth. At that point, the Fed can begin to withdraw policy support in order to prevent an outbreak of inflation.”

Lovely in theory, disastrous in practice… as Mr. Rickards tweeted pithily yesterday afternoon.

The one thing Yellen and crew managed to communicate clearly was the continued “tapering” of the Fed’s bond purchases in $10 billion increments. As our old friend the tapir shows us, starting next month, they’ll cut back from $65 billion a month to $55 billion.

But matters got muddled on FoGu, our preferred shorthand for “forward guidance” — the question of how long the fed funds rate would remain near zero, as it’s been since December 2008. As the fed funds rate goes, so goes the rate you get on short-term Treasuries and CDs.

Yesterday, after 15 months, the Fed gave up on keying that decision to the unemployment rate. Instead, according to the Fed statement, “it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.”

Um… OK, so what’s “a considerable time,” Ms. Yellen?

Back to the Financial Times: “Markets briefly plunged when Ms. Yellen implied rates could rise six months after the Fed stops buying assets. If its bond purchases end as expected this autumn, that would suggest rate increases could begin around April 2015, much earlier than expected.”


Traders/junkies long ago made their peace with the idea that their monthly fix would go bye-bye come this fall. But the suggestion they’d next have to go out and get a job six months later? Too much. The Dow tanked more than 100 points the moment the words “about six months” slipped from Ms. Yellen’s lips.

  “Treasury yields rose on expectations the Fed will soon retreat from the bond market,” says 5 Min. PRO editor Dan Amoss. “A rising-yield trend may continue for a while. However, the Fed would panic over spiraling Treasury yields and reignite its QE policy.

“Gold prices fell as Treasury yields rose. But it’s only a matter of time before the gold market reflects the trap the Fed has set for itself. QE cannot be reversed without severe damage to prices of bonds, housing, and stocks.

“QE is losing its potency to drive further gains in asset price. Yet nonstop QE may also be required to simply sustain the artificially high prices of bonds, stocks and housing.”

Jim Rickards is in broad agreement. Never mind rising rates: The taper itself, he believes, will be put on hold this summer.

  This morning, the major U.S. stock indexes have recovered roughly half of yesterday’s losses. At 1,866, the S&P 500 is only 13 points off its record close set on March 7.

“From a technical standpoint, nothing has changed in the S&P 500,” says Jonas Elmerraji of our trading desk. “After last week’s big declines, the S&P started this week by moving higher, but it’s still riding the top of its price channel right now. That means there’s a lot more downside risk than upside opportunity.

“A correction down to support,” Jonas concludes, “still looks more likely than not.”

  Gold has found a new floor for the moment at $1,328.

“After last week’s big breakout,” writes Greg Guenthner in today’s Rude Awakening, “the yellow metal failed near $1,390 early Monday morning. Gold has now moved steadily lower for the past four days.

“Go ahead. Blame the Fed. Blame manipulation. Hell, blame me. I don’t really care. The truth is you just witnessed a classic failed breakout. Gold teased us up above support, only to come crashing down in spectacular fashion.

“Here’s the thing about failed breakouts — they usually lead to incredibly strong moves in the opposite direction. That’s what we’re seeing right now in gold.

“I’ll have more to say on this topic over the next few days. To be continued…”

  Another day, another round of toothless economic sanctions against Russia.

This morning, President Obama signed an executive order granting himself the authority to impose sanctions on “key sectors of the Russian economy” — should he decide it comes to that.

As we’ve indicated all week, the sanctions are mostly theater; both the U.S. and Russia are hip to the “financial balance of terror” Jim Rickards has written about and don’t want to rock the boat too much.

On the other hand, the Crimea crisis might wreck the Iranian nuclear talks. Russia has done much to grease the way for those talks. But for how long?

“We wouldn’t like to use these talks as an element of the game of raising the stakes,” said Russia’s deputy foreign minister Sergei Ryabkov. “But if they force us into that, we will take retaliatory measures here as well.”

He didn’t specify what those measures would be… but it would probably mean selling Iran new equipment for its civilian nuclear power program.

  If that has the effect of wrecking the Iran nuclear talks, it would be “mission accomplished” for neoconservatives in Washington.

Or at least that’s the theory of Robert Parry, the veteran reporter who got many of the biggest scoops during the Iran-Contra scandal of the 1980s.

“The neocons,” Parry writes, “have succeeded in estranging U.S. President Barack Obama from Russian President Vladimir Putin and sabotaging the pair’s crucial cooperation on Iran and Syria, which may have been the point all along.

“Though the Ukraine crisis has roots going back decades, the chronology of the recent uprising — and the neocon interest in it — meshes neatly with neocon fury over Obama and Putin working together to avert a U.S. military strike against Syria last summer and then brokering an interim nuclear agreement with Iran last fall that effectively took a U.S. bombing campaign against Iran off the table.”

Remember Victoria Nuland, the State Department official who dropped the F-bomb while describing Washington’s regime-change plans in Ukraine? She’s married to Robert Kagan, one of the think-tank types who agitated loudest for the Iraq war.


 “Money Is Just an IOU, and the Banks Are Rolling in It,” says a provocative headline in The Guardian.

Lest we spend too much of our 5 Mins. today on the alchemy of central banking, we see the Bank of England is out with a paper that confirms what our Chris Mayer told you in this space last December.

“To get a sense of how radical the bank’s new position is,” says Guardian writer David Graeber, “consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest — either to consumers or to entrepreneurs willing to invest it in some profitable enterprise.”

The reality, says Graeber, is that “when banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognize as legal tender by its willingness to accept them in payment of taxes.”

Or as Chris said three months ago, “Banks do not lend out deposits. Loans create deposits.

“This is why lending is called ‘credit creation.’ The deposits come from nowhere. With a few keystrokes, the banking system creates money. Neat trick, right?”

As always, don’t try this at home…

  And now the latest inventive way to smuggle gold into India — flowerpots.

Bloomberg tells the story of Mohammed Ahmed Jaffer, a welder who was used as a “mule” by an importer seeking to get around India’s 10% customs duty on gold. Court documents claim he was offered a little under $500 to sneak in a kilogram of bullion worth $50,000. Alas, customs agents discovered the gold in the lining of Jaffer’s brass flowerpot.

We’re not surprised: That’s not nearly as inventive as old-style tube TVs with capacitors made of gold — a ruse we related last summer.

With any luck, it will be a moot point soon and India’s curbs will be lifted. Already today we see the government is allowing five private banks to start importing gold again…

  “I wondered the same thing,” writes one of our regulars when a reader speculated yesterday that Russia might demand payment for its natural gas in rubles or yuan.

“Only I was thinking gold. Gold for gas!

“Would gold flow from Fort Knox to Germany, to Russia?”

The 5: O the irony…

  “Byron must be dreaming,” writes a reader about Byron’s suggestion yesterday that U.S. oil production will grow as much as 4.4 million barrels a day over present levels.

“No mention of the depletion rates in these tight oil and gas formations? Sloppy!”

The 5: Byron is all too aware of how quickly output from shale plays can decline. “Out in the field, one routinely sees numbers like 60-70% decline rates in the first year and still shockingly high decline rates thereafter.

“In other words, ‘good’ oil wells become ‘strippers’ in a matter of a few years. Thus, we wind up on a drilling treadmill, requiring more and more new drilling to keep up the same output over time. It’s a problem that will grow in size and scope over the next two decades. By, say, 2030, we’ll understand how the ‘good old days’ are truly today. (I hope you’re enjoying the party.)”

But between now and then, the profit opportunities are nothing short of staggering — hence the new “Texas Rich in 60 Days” strategy we’ve developed. Our exclusive online briefing began today at 1:00 p.m. EDT, but in case you missed it, we’ll send along a link later today so you won’t miss a thing. Watch your inbox around 4:00 p.m. EDT.

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. The “Texas Rich in 60 Days” strategy is unlike anything you’ve seen before. It’s not a single stock. It’s not a fund. Nor is it an ETF, MLP or other vehicle you’ve run across. And it has the potential to turn a $500 grubstake into a jaw-dropping $2.8 million in only two months.

If you couldn’t catch the briefing when we put it out early this afternoon, you’ll get a second chance a very short time from now. Again, watch your inbox for the link around 4:00 p.m. EDT.


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