By: Bill Fleckenstein
August 31, 2013
As the walls close in on central bankers and their inane policies, they seem ready to fight with the only weapon they know how to use: the printing press.
Though it may have largely been lost in the shuffle of Middle East headlines, sales of new homes fell 13.4% in July to 394,000, which was a far cry from the 487,000 forecast by the consensus and the biggest variance from expectations in more than five years. In addition, sales in June were revised down to 455,000 from 497,000.
Those numbers are proof that whatever logic the real estate Pollyannas, who said mortgage rates weren’t going to affect demand for new homes, were using is totally false.
More than just in the neighborhood
First, hats off to real estate analyst Mark Hanson (aka Mr. Mortgage), who completely nailed this statistic a few weeks ago and has gotten just about every data point on the housing market right recently. By extension, that means all the economic bulls who predicated their thinking on a “sustainable” housing recovery — and that includes the Federal Reserve (based on what I have heard various Fed heads say) — need to go back to the drawing board.
In light of that, as well as the seemingly sudden importance of unrest in Syria, I am reminded of a point I have made many times, though not recently: Markets these days seem to discount next to nothing. My guess would be that is a function of quantitative easing, computer-driven trading and so many “professional” babysitters of Other People’s Money trying to stay close to their benchmarks.
A game of wait, then hurry up
While computers can read press releases, listen to conference calls and compare the price action at any given moment to any day in history, slicing and dicing the data in a million ways, what they probably don’t do is attempt to discount future big-picture developments; their main strategy is being able to react faster than the next guy.
Thus, large geopolitical problems or long-simmering macro problems don’t matter until they start to matter, at which point discounting that should have taken place along the way tends to occur in a short space of time. If I am correct in this thesis, it means there are going to be plenty of prospective dislocations as various problems come home to roost.
The hot air beneath our wings
Obviously, the unrest in various parts of the globe is going to add pressure on the Fed not to taper, but the employment report next Friday will have a fair amount of say in terms of swaying market opinion.
However, the inclination of central bankers, I think, was typified by Mark Carney, the head of the Bank of England, who said on Wednesday that the BOE stood ready to add stimulus if investor expectations for higher interest rates rise too far and undermine the recovery. If he feels that way, the Federal Reserve probably does as well.
In a perfect world, the Fed would announce at the September meeting of the Federal Open Market Committee that it is not going to taper (and we can see where stock and bond rallies want to fail), [RD(1] which should help the world see that the Fed is trapped: Its policies don’t work, yet it can’t stop pursuing them.
To wit: Four years ago Ben Bernanke and company talked about exit strategies. Now, they discuss only reducing the amount of monthly money printing from $85 billion to $70 billion — and if they try to do even that, they are going to find out they have to reverse gears and go the other way.
Only the bond market can put this insanity to rest.
I believe we are very close to the world realizing that the Fed is trapped. The only question is when will people realize it and understand the consequences?
Around here we call them ‘wish doctors’
Speaking of trapped central bankers, an Aug. 22 article in the Financial Times by Gillian Tett, headlined “Central bank chiefs need to master the art of storytelling,” concluded with what I thought surely had to be a spoof.
“The next Fed chair also needs to be a masterful storyteller and cultural analyst, who can read social sentiment, shape norms, (re)create trust and persuade us all to think in a manner that suits the Fed’s economic goals, without us even noticing.
“Somebody, in other words, who can cast spells with both their spreadsheets and words. In short, what is needed is nothing less than a monetary shaman.”
But then I realized which newspaper she was writing for, and that she was deadly serious.
It’s a crying sham
I think Tett’s soliloquy perfectly captures how far the pendulum has swung from the gold standard — and that it can go no further in this direction.
What we need, in her view, is someone who can make us believe that reality is different than it is. This is an absolutely priceless vignette to save for the future to illustrate how detached financial thinking has become from anything resembling common sense. Of course, the joke is on her, as she doesn’t realize that what she wants is exactly what we already have: charlatans who have no shame.