Quantity over quality

Zero Hedge has a piece on Fed policy that is worthy of being shared.

No, all of these are secondary items. Here is what is of absolutely critical importance in the just released Goldman letter, nested deep in Hatzius’ final paragraph, where it would otherwise be missed by most:

…we have found some evidence that at the very long end of the yield curve, where Operation Twist is concentrated, it may be not just the stock of securities held by the Fed but also the ongoing flow of purchases that matters for yields…

For those who are aware of the Fed’s sentiment vis-a-vis the debate of stock vs flow of money effect, this will be a stunning revelation. Especially since it vindicates what we have been saying since day one, namely that when it comes to securities price formation in a centrally-planned regime, it is flow not stock that matters. And as those who follow the Fed’s thinking know too well, the Fed is convinced it is stock, not flow that serves as a consistent catalyst for subjective risk valuation. The above quote is just the first crack in the Fed’s thinking, because if Goldman now believes this, so will Bill Dudley, following his next meeting with Jan Hatzius at the Pound and Pence, and shortly thereafter, it will become canon at the Fed.

One way of visualizing what this means is to think of a shark which has to be constantly in motion in order to survive. Well, the allegory of Jaws can be applied to liquidity addicted capital markets. Translated simply, it means that it is irrelevant if the Fed’s balance sheet is $1 million, $1 trillion or $1,000 quadrillion. A primacy of flow over stock means that UNLESS THE FED IS ACTIVELY ENGAGING IN MONETIZATION AT EVERY GIVEN MOMENT, THE IMPACT FROM EASING DIMINISHES PROGRESSIVELY, ULTIMATELY APPROACHING ZERO AND SUBSEQUENTLY BECOMING NEGATIVE!

You should read the entire article, but I wanted to highlight this part as it reinforces something I am often criticized for. Clearly, Fed policy is directed by style over substance as appearances are everything. Liquidity is paramount as money on the sidelines detracts from the shell game. The Fed needs the money to keep flowing. This is why they get involved with their stealth stock purchases to keep the illusion alive.

I get knocked because I note the importance of consumer confidence. Austrian economists dismiss it as myth, but in Fed world it is very much a part of the show. It directly feeds into consumer spending which is central to the Keynesian business cycle theory. Consumers need to ‘feel’ that illusion of recovery so they will keep spending money. It’s not about whether or not this is a successful model to operate under. It is what it is. We can point out what we should be doing all day long but the fact is the Fed requires consumer confidence leading to consumer spending leading to liquidity spending. As the article said, it’s about “flow”. So never fear, the “crash” is still on schedule coming to a neighborhood near you.

Is the nearly billion dollar Federal Air Marshal program still needed?

Armed Pilots Greatly Outnumber Better-Known Federal Air Marshals WASHINGTON (CNN) — President Barack Obama’s budget ax is falling hard on a program that allows pilots to carry handguns in the cockpit as a last line of defense against terrorists. Obama’s proposed 2013 budget cuts in half funds for the Federal Flight Deck Officer (FFDO) program. The current budget of $25 million a year — which goes for such things as conducting background checks, training the pilots, and periodic gun proficiency tests and retraining, in addition to administrative costs — would be cut to $12 million. The thousands of armed pilots, who greatly outnumber the better-known federal air marshals, volunteer for the job, train at federal academies and are deputized to use their weapons in the cockpit. They call themselves the “single most cost-effective counter-terrorism measure” the government has taken. The federal government spends about $15 a flight for FFDOs, as armed pilots are called, compared to $3,000 per flight for federal air marshals, said Mike Karn, vice president of the Federal Flight Deck Officers Association. Those numbers are based on costs of the respective programs divided by the number of flights covered by armed pilots and air marshals. As recently as last March, Homeland Security Secretary Janet Napolitano voiced support for the program, agreeing with Rep. Chip Cravaack, R-Minnesota, a former airline pilot and FFDO, that it was a vital part of the country’s layer defenses. But in the budget documents released Monday, administration officials said security measures put in place since 2001, such as locked cockpit doors and 100% screening of airline passengers, “have greatly lowered the chances of unauthorized cockpit access.” The proposed budget also cuts Federal Air Marshal Service funds almost 4%, to $927 million. It is unclear whether that cut will result in fewer air marshals. The number of air marshals is classified. The $36.5 million budget cut for the air marshals reflects “efficiencies and program changes that leverage other aviation security system enhancements, allowing for more efficient mission deployments focused on high-risk flights,” according to the Department of Homeland Security. A current flight deck officer, contact by CNN, called cuts to the FFDO program “very surprising.” “I think that this is just another example of essentially TSA (Transportation Security Administration) and DHS mismanaging a highly efficient program, that operates on cents on the dollar compared to (air marshals),” said the pilot, who spoke on condition that he not be named. The program prohibits pilots from identifying themselves as FFDOs for security reasons. The flight deck officer said he believes the cuts will result in fewer flights being covered by armed officers. “You’re cutting the feet off the (FFDO) program,” said Mark Weiss, a former pilot who served as deputy chairman of security for the Allied Pilots Association, the bargaining unit for American Airlines. “It’s extremely shortsighted.” Weiss, now with the Spectrum Group in Washington, said the government is sending a “very clear message” to armed pilots that they are not valued. “It’s probably (a message) that they’re very appreciative of hearing in terrorist camps around the world,” he added. Like the federal air marshal program, the FFDO program has been marred by occasional mishaps. An FFDO pilot was removed from the program, and his airline, after he accidentally discharged his gun in the cockpit. No one was injured.

Obama cries foul to WTO over China rare earth mineral exports showing his hypocrisy

The Keystone XL pipeline controversy has had the effect of clearly illustrating to the American people that the Obama ideology concerning green energy trumps economic fundamentals. This is not to say that the President doesn’t understand such basic principles of supply and demand, because he clearly does. It’s simply a matter of priorities. For example, just last June he reversed course on a policy decision and released 30 million barrels of oil from the nation’s 700+ million barrel reserve supply in an effort to lower gas prices due to a tightening of market supply from the Libyan uprising. With Obama, ideology always trumps economic reality. He conducted the now infamous interview with Charlie Gibson of ABC News in which he acknowledged the fact that lowering the capital gains tax rate results in increased overall revenue, yet his reason for supporting the increase anyway was out of a “sense of fairness”.

October of 2011 gave us another classic example of the hypocrisy concerning his publicized reason for not approving the Keystone XL pipeline project. His stated reason is inadequate time for the E.P.A. to conduct an environmental impact study. Apparently three years was inadequate. Yet last October, California based Molycorp received a drilling permit just two months after locating a new heavy rare earth deposit. From the story in the Atlantic.

In October 2011, Molycorp announced that they discovered a heavy rare earth deposit near their Mountain Pass facility and received permission to drill two months later. The heavy rare earths terbium, yttrium, and dysprosium are necessary for manufacturing wind turbines and solar cells, so the government has a particular interest in finding sources of those elements within the US.

Aha! The key phrase ”necessary for manufacturing wind turbines and solar cells”. It fits the ideology. Wait, you say, this is only a single mine and not an international pipeline crossing thousands of miles with the potential for environmental disaster all along the way. But we find out in the article that the reason the Molycorp mine was shut down in 1998 was exactly one of those environmental disasters. So this mine already has a proven track record and not just the potential of a spill. Yet the Obama Administration still fast tracked the permit. Again, ideology trumps.

As I said earlier, Obama perfectly understands supply and demand theory. This is why he just filed a complaint, along with the EU and Japan, with the World Trade Organization to protest China’s actions concerning export policy on rare earth minerals. The Congressional Research Study released a report last September covering the rare earth elements global supply chain. Here is a quote on the U.S. policy.

U.S. mineral policy emphasizes developing domestic supplies of critical materials

and encourages the domestic private sector to produce and process those materials

There is no global shortage of rare earth mineral reserves. Far from it. The problem is extraction. In fact, rare earth minerals are a very misleading name. They should be called widely dispersed minerals as they are easily found in the earth’s crust, just not in concentrated deposits. In a somewhat ironic twist, they also play a role in petroleum fracking as Lanthanum is used in fluid catalytic cracking. The Dept. of Energy has released its updated report on Critical Materials Strategy, and the general tone is supply issues.

I bring all this up just to highlight more blatant Obama hypocrisy. Rare earth minerals are considered a national security objective just as oil is publicly stated to be. Yet actions speak louder than words. Obama won’t pursue domestic oil and gas production expansion on a scale that matches the proven reserve availability. Environmental issues are the excuse for slowdowns. However, rare earth mineral mining is extremely dirty and that’s OK because it’s required for his green agenda. It’s funny that China has stated the reason it is slowing rare earth mineral exports is for environmental safety issues, something Obama should certainly be able to get behind. But not if it stands in the way of his windmills, electric cars and solar power here at home. Pathetic.

Coal power generation use plunges to decades low usage

Coal fired power plants have seen their lowest percentage of U.S. power generation in nearly 34 years dropping below 40% for November and December of 2011. It was March of 1978 the last time it was this low.

Why is coal usage down? The low price for natural gas, of course. Natural gas prices in January, 2012 were hovering around 10 year lows.

Auto sales, auto bailouts, auto financing – nothing is at is seems

Researching the murky world of auto bailouts requires a few ground rules at the outset. Recipients of bailouts like to think of a bailout as a grant or giveaway program. In other words, any type of loan is not a bailout since the recipient was obligated to pay it back. On the other hand, absent a rescue loan, those same recipients claim that liquidation would be the result. A credit line, or loan, that would stave off liquidation would certainly seem to qualify as bailing someone out, wouldn’t it? With that in mind, we can look at the credit arms of the Big 3 (now the Big 2 since Fiat owns Chrysler).

As I’ll illustrate further along, Ford Motor Credit exercised multiple loan programs during the financial crisis. Ford Motor Co. likes to claim the company took no public bailout money and has leveraged that claim quite successfully in a public relations ad blitz into increased sales and a very visible division between them and their competitors. Ally Financial, formerly GMAC, is a private company and obtaining records is difficult. They have left a trail, however, and you can draw some viable conclusions accordingly.

In both cases, the public perception is strikingly different from reality. The amount of credit utilized, the sources, and the reasons behind it are not at all what you see on the nightly news. Nor what you hear from the rank and file if you live in the heart of the auto industry as I do. Let’s see if we can clear up some misconceptions.

Ford makes the claim that they didn’t receive any public bailout money at all. They did request a $9 billion dollar credit line from the Treasury.

Ford’s Request:
A “stand-by” line of credit in the amount of up to $9 billion
at Government borrowing rates, for a 10 year term, with TARP conditions,
to support our restructuring, including the acceleration of products
that consumers want and value.

Federal Reserve adding another nail to the coffin

The Federal Reserve is adamant about meeting its mandates so much so that it will utilize whatever statistics make it appear their policies are working. Ask anyone who exists in the real world and they will tell you that the ‘official’ inflation rate as reported each month by the Bureau of Labor Statistics (BLS) through the consumer price index (CPI) is out of whack with what they are paying. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Not to worry. Federal Reserve Chairman Ben Bernanke agrees with you that the core CPI numbers are too unstable and unreliable. Forget the fact that core CPI excludes food and energy prices already, the result was still too high to justify the Fed’s actions. So Bernanke has switched to personal consumption expenditures (PCE) as a baseline for setting monetary policy. PCE is supposed to better reflect changes in people’s buying habits. Historically it runs about 1/3 lower than CPI.

I won’t bore you with all the technicalities involved with the methodology utilized in measuring inflation as you can find it all over the web. Suffice it to say that employing a statistical measure (PCE) that consistently runs 1/3 lower than the previously utilized measure (CPI) which is only a fifth of the real inflation rate as measured by the real feel pain in consumer’s wallets can not lead to anything good. The Fed has a dual mandate of price stability and full employment. Anyone following the unemployment numbers is aware of the fallacy of their measure as well. It only stands to reason that the Fed use artificially low measures of inflation to go along with the massive block of unemployed or underemployed Americans. It’s not at all unrealistic to take the ‘official’ unemployment and inflation numbers and multiply them by a factor of two or three, possibly even more, to get a true picture of our economy.

So why would the Fed engage in such destructive practices? The incessant flooding of the market with liquidity hasn’t seen the corresponding increase in velocity the Fed desires. Simply put, the money isn’t circulating throughout the economy, it’s sitting dormant. The Fed sees this as a problem. They respond to low velocity with further stimuli in a vicious circle of chasing increased economic activity. Economic activity is what fuels the measure of Gross Domestic Product (GDP). Here we go with another misleading measure of the economy. High volumes of economic activity (money changing hands) drives a high GDP number. Along with the artificially manufactured low inflation and unemployment numbers, the Fed wants an artificially high GDP number. This is the broken window fallacy of Keynesians. Economic activity just for the sake of appearing productive doesn’t grow the economy. Only economic activity that increases wealth is productive.

Undecided on this election? Not sure which direction the country should follow? Here’s the way NOT to go!

There are no better examples to educate people than something close to home everyone can relate to. I say that because we are constantly being reminded that we are headed toward Greece everyday. They are collapsing under their debt burden and in many respects, the U.S. is already in a worse position than they are. But I don’t believe the majority of Americans take the threat seriously because Greece is such a small island nation and we are a superpower. Apples and oranges. So perhaps a better example is one right here in America. It’s the city of Detroit.

Detroit has been a textbook testbed for progressives for over half a century and has illustrated in the clearest possible terms the guaranteed failure of socialism. It’s fitting that a major plank of the progressives is equality of outcome as opposed to equal opportunity. Detroit has delivered. The following is an article from Jarrett Skorup written for the Michigan Capitol Confidential. He does an excellent job laying out the phenomenal decline of a once great city. With our oh-so-important election coming up, it’s another reminder that we need to change course in America asap.

Detroit: The Triumph of Progressive Public Policy

How did this great city fall so far?

By Jarrett Skorup | Feb. 14, 2012

(Editor’s note: This is an updated version of an article that originally appeared on July 6, 2009.)

Imagine a city where all the major economic planks of the statist or “progressive” platform have been enacted:

• A “living wage” ordinance, far above the federal minimum wage, for all public employees and private contractors.
• A school system that spends significantly more per pupil than the national average.
• A powerful school employee union that militantly defends the exceptional pay, benefits and job security it has won for its members.
• Other government employee unions that do the same for their members.
• A tax system that aggressively redistributes income from businesses and the wealthy to the poor and to government bureaucracies.

Would this be a shining city on a hill, exciting the admiration of all? We don’t have to guess, because there is such a city right here in our state: Detroit

Number of Americans no longer looking for work exceeds the total population of 32 States

This is the era of impossibly large numbers we can’t even comprehend when it comes to our nation’s debt. Another area of confusion is the unemployment situation. The Bureau of Labor Statistics compiles a monthly Employment Situation Summary which gives us the official unemployment number for the nation. It also includes various other statistics, one of which is found in Household Data, Summary Table A. For the month of January, 2012, the number “Not in labor force” is one of those astonishing numbers that’s hard to comprehend. It’s 87,874. Which translated means 87,874,000 million people of working age are no longer even looking for work for various reasons.

Just to clarify, what exactly qualifies as “Not in labor force”? From the BLS, here is the official definition.

Includes persons aged 16 years and older in the civilian noninstitutional population who are neither employed nor unemployed in accordance with the definitions contained in this glossary. Information is collected on their desire for and availability for work, job search activity in the prior year, and reasons for not currently searching

So, you must be of working age, not in prison, not working nor even looking for work.

In an effort to try to get a better perspective of just how large a number this is, I thought I would compare it to something one could visualize easier. That is state populations. Our army of people “Not in the labor force” would exceed the population total of 32 states! Yes, you read that correctly. Here they are based upon 2010 U.S. Census numbers, the latest available.

Wyoming, Vermont, Alaska, North Dakota, South Dakota, Delaware, Montana, Rhode Island, Hawaii, New Hampshire, Maine, Idaho, Nebraska, West Virginia, New Mexico, Nevada, Utah, Arkansas, Kansas, Mississippi, Iowa, Connecticut, Oregon, Oklahoma, South Carolina, Kentucky, Colorado, Alabama, Louisiana, Minnesota, Arizona and Maryland.

The population of all of those states combined is 86,817,688 based upon 2010 census numbers. And the economy is getting better?

GM sets all-time record profit of $7.6 billion. Is it proof the Bush/Obama auto bailouts worked?

GM has announced an all-time record profit for 2011 of $7.6 billion dollars. You will hear that endlessly this year as Obama takes credit for saving the auto companies. So once again we need to take a look back and do some fact checking.

The auto bailouts, as they are known, were bridge loans extended to GM, Chrysler and their financing arms. What was their purpose?  To prevent the auto companies from going into bankruptcy. As you’ll recall, they did anyway. So on its face, the claim of any bailout success is false. Bankruptcy, or restructuring, means a company has failed and needs protection from its creditors under bankruptcy law. GM and Chrysler clearly failed by going bankrupt so any claim of success due to the bailouts is a lie pure and simple.

The claim that is often made is that by extending the bailout funds, the Treasury rescued the companies from completely failing and thus saved over 1 million jobs. Some industry reports claimed 3 million potential job losses throughout the entire supply chain.  What happens when a company files for bankruptcy protection? They are allowed to reorganize under the protection of law which is exactly what they did. Going bankrupt doesn’t mean all the factories close, the dealerships, the suppliers and other vendors, etc. That’s called going out of business, liquidation,  a completely different scenario than bankruptcy. GM and Chrysler weren’t planning on going out of business, they were trying to avoid bankruptcy, so the claim of saving over a million jobs is unsubstantiated.

Now, what is the administration and the bailout defenders claim? That due to the credit crisis brought on by the recession, there would be no credit lifeline for the auto companies and they would just be allowed to fail. Accordingly, we had to tap the TARP funds to provide that lifeline no one else was capable of providing. They were needed to provide operating cash and loan funds for consumers. The claim is always made that total liquidation would occur without allowing for the likelihood of reorganization under bankruptcy protection. Scaremongering is certainly nothing new with government when it needs to put forth an agenda item and repayment of union support in the Obama election was on that agenda.

President Obama – where have the 6,851,000 jobs gone?

Have to throw my two cents in on the latest unemployment numbers. It’s becoming quite clear that Obama is going to have his high 7/low 8 unemployment number for the November election. That allows him to sell his stimulus as a success if the number is below 8% as he promised taking away one of the GOP’s biggest talking points of the last couple of years. They had better start selling the numbers that really matter which is the number of employed people in this country, rather than the skewed numbers of the unemployed.

Directly from the Bureau of Labor Statistics, Table A, Household Data. The number not in the labor force. January 2012 – 87,874 (in thousands). The number from January 2009 when Obama took office – 81,023 (in thousands). Subtract the difference and we get 6,851 (in thousands).

It means we have 6,851,000 less people working today than we had when Obama took responsibility. Nearly 7 million less Americans working (and paying taxes) today than just 3 short years ago. Obama can’t dispute those numbers because they’re from his own agency, the same one he uses to promote the unemployment rate number. He can claim his stimulus created millions of new jobs but the numbers don’t support it.

The GOP better get it together quick and start harping on the relevant numbers everyday so the squishy middle gets it before election day.

Disclaimer – all of these numbers are BLS numbers which are highly suspect based upon their methodology. However, it helps to use the same source Obama is citing when refuting his claims.

Source – http://www.bls.gov/news.release/empsit.a.htm

Source – http://www.bls.gov/news.release/archives/empsit_02062009.htm