Bernanke:- We lost control

[icm63]

Re: Bernanke:- We lost control

It's not that Yellen will not be allowed to use the controls, it's that there aren't any. There's just these two switches, one for each engine. Good luck!

p.s. If you smell smoke that's that's just the Li-ion batteries burning. Nothing to worry about. They are well contained.

Oh God, the situation is so bad EJ pulls out the humor.

Buying GOLD, OIL, FOOD, FARMLAND, SHOT GUNS and all the Jazz music I can find!

[lakedaemonian]

Re: Bernanke:- We lost control

It's not that Yellen will not be allowed to use the controls, it's that there aren't any. There's just these two switches, one for each engine. Good luck!

p.s. If you smell smoke that's that's just the Li-ion batteries burning. Nothing to worry about. They are well contained.

http://en.wikipedia.org/wiki/United_Airlines_Flight_232

I wonder if we can start an iTulip meme somehow referring to Flight 232?

Maybe "Solution" 232

[EJ]

Re: Bernanke:- We lost control

http://en.wikipedia.org/wiki/United_Airlines_Flight_232

I wonder if we can start an iTulip meme somehow referring to Flight 232?

Maybe "Solution" 232

Good catch. That is of course exactly the incident from which I draw my analogy. However, I think we cannot use 232 explicitly out respect those who lost their lives in that crash.

[phinolerun]

Re: Bernanke:- We lost control

Good catch. That is of course exactly the incident from which I draw my analogy. However, I think we cannot use 232 explicitly out respect those who lost their lives in that crash.

EJ, I remember you mentioning that the final bond crisis is still probably a few years away, however, there seem to be a few events quickly approaching that make me think there is a possibility of this happening a little sooner.

1) Janet Yellen taking over with a lack of controls plus the historical precedence of one Fed chief passing the stick of dynamite to the next (ie the crash of 2014)

2) You've mentioned that rates rising above 3% "lights the fuse." This could possibly happen this year or early next year.

3) A severe malfunction in China that temporarily removes them from being the financier of last resort for the US.

4) An oil price shock that of course is one of the most unpredictable events in our list of catalysts.

5) Mid gap recession that pushes the US one step too far over the fiscal edge.

I'm sure there are a few others that I'm missing, but my point is that with the arguments you've made on all of the points above ... a 2017 - 2019 window seems rather optimistic.

[Forrest]

Re: Bernanke:- We lost control

EJ, I remember you mentioning that the final bond crisis is still probably a few years away, however, there seem to be a few events quickly approaching that make me think there is a possibility of this happening a little sooner.

1) Janet Yellen taking over with a lack of controls plus the historical precedence of one Fed chief passing the stick of dynamite to the next (ie the crash of 2014)

2) You've mentioned that rates rising above 3% "lights the fuse." This could possibly happen this year or early next year.

3) A severe malfunction in China that temporarily removes them from being the financier of last resort for the US.

4) An oil price shock that of course is one of the most unpredictable events in our list of catalysts.

5) Mid gap recession that pushes the US one step too far over the fiscal edge.

I'm sure there are a few others that I'm missing, but my point is that with the arguments you've made on all of the points above ... a 2017 - 2019 window seems rather optimistic.

Can we please just get well into 2014 before they start the experimentation with turning things on and off? I need some addiltional prep time, and I want to re-fold my parachute!

[doom&gloom]

Re: Bernanke:- We lost control

Oh God, the situation is so bad EJ pulls out the humor.

Buying GOLD, OIL, FOOD, FARMLAND, SHOT GUNS and all the Jazz music I can find!

Be sure to put some Horace Silver in there, Best of on Blue Note Vol. 2 at a minimum.

[Mega]

Re: Bernanke:- We lost control

Ok, lets take this a step further, we call the Ecomery the plane & the FED the pilots. Bulsh1t aside "They" know the plane IS going to crash. Lets assume the threats of war to Russia/China etc have failed & the "Eastern empire" has called their bluff.

Ok, if they try to land in the normal sense its a smoking hole in the ground, may be they can ditch like the crash in New York a few years ago. They sussed they couldn't make JFK so a controled crash was the best option they had.

Controled crash = Global Reset...........i think in Oct after Russia has faced down the West in Syria there be a "Deal"...........not sure what but something.

Mike

[EJ]

Re: Bernanke:- We lost control

EJ, I remember you mentioning that the final bond crisis is still probably a few years away, however, there seem to be a few events quickly approaching that make me think there is a possibility of this happening a little sooner.

1) Janet Yellen taking over with a lack of controls plus the historical precedence of one Fed chief passing the stick of dynamite to the next (ie the crash of 2014)

2) You've mentioned that rates rising above 3% "lights the fuse." This could possibly happen this year or early next year.

3) A severe malfunction in China that temporarily removes them from being the financier of last resort for the US.

4) An oil price shock that of course is one of the most unpredictable events in our list of catalysts.

5) Mid gap recession that pushes the US one step too far over the fiscal edge.

I'm sure there are a few others that I'm missing, but my point is that with the arguments you've made on all of the points above ... a 2017 - 2019 window seems rather optimistic.

Since we started in 1998, a long, scary list of risks to the economy and markets can at any time always be drawn up that justifies keeping a significant portion of one's portfolio in cash and gold. But at the same time an equally long list of encouraging developments can also be made. The challenge always is in making the right decisions based on a balance of these risks and opportunities at any given time. This is made all the more difficult by the fact that several of the risks you itemize above, and I think you hit on all the majors, are unprecedented and so difficult to gauge with respect to extend and duration.

One way to evaluate each risk item is to ask, What are the likely crisis scenarios for each, likely policy responses, and likely effectiveness of responses? That is the way I approached the crisis event forecast in 2006 that came to be known as the Global Financial Crisis which we refer to here as the American Financial Crisis (AFC).

Taking your list one at a time, the answer to these questions look like this.

1) Janet Yellen taking over with a lack of controls plus the historical precedence of one Fed chief passing the stick of dynamite to the next (ie the crash of 2014)

Bond markets hate Fed regime change because it introduces policy change risk. The extent of the correction we are likely to get is impossible to determine. The window, Q2 to Q3 2014, is only an educated guess based on past market behavior and also on unique antecedents.

2) You've mentioned that rates rising above 3% "lights the fuse." This could possibly happen this year or early next year.

My next article, All About Bonds, starts off with a primer on bonds and how they are priced by markets. Financial journalists will often throw the phrase "bond prices move in the opposite direction from interest rates" into stories but they never explain why, and I suspect the majority of them don't know. While the "why" is understood, although perhaps not internalized, by anyone who has passed the Series 65 investment advisor exam, understanding the way bonds price is crucial to understanding what is likely to happen when the Fed begins to reprice previously price-fixed bonds downward. A factor of pricing behavior that is unique to bonds is that the issuance of a bond with a higher or lower interest rate instantaneously reprices all other bonds in existence of similar credit quality and duration. The reason is that as the coupon of every* bond is fixed, the only way that yield equivalency can be achieved is by changes in the principle value of the bond. I'll explain this and why it matters.

By analogy, think of global markets as settling into a complex set of trade transaction and price relationships like a standing wave pattern on the surface of a pond into which water drips after a rain from the trees above from leaves in various locations and varying rates, but imagine the rainfall (global credit creation) as relatively steady.

The AFC was a series large stones thrown into this pond that temporarily obliterated the standing wave pattern. The rock cascade was stopped and the drips restored for the most part within a few months, albeit with lasting changes. Some of the drips got bigger and others smaller, a few new leaves were added.

My chief worry is that in mucking with the structure of the bond markets central banks have inadvertently set up a condition for both the inputs and the leaves above the pond to radically change, and as a result for the standing wave pattern of trade transaction and price relationships below will shift as radically, with less than beneficial results of producers and consumers.

3) A severe malfunction in China that temporarily removes them from being the financier of last resort for the US.

China acted as America's IMF during the AFC. Could it do so again if another crisis originates in the U.S.? If not China, then who can and will? What if the next global financial crisis originates in China? How might that crisis propagate to the rest of Asia, Europe, and the U.S. and what will the policy response be? One obvious result will be a rapid decline in demand for commodities. In the next article we try to map out a series of scenarios.

4) An oil price shock that of course is one of the most unpredictable events in our list of catalysts.

The good news on an oil price shock is that these are largely self-correcting. A price spike will induce a fresh PCO recession, which will in turn lower demand, to which decline in oil demand oil markets will respond with lower prices, albeit in a PCO world with not as large a correction as previously. The bad news is that such a price shock and recession can trigger other events, such as a mid-gap recession.

5) Mid gap recession that pushes the US one step too far over the fiscal edge.

The official position that Larry Summers represents is that previously predicted fiscal thresholds have been "comfortably surpassed." But note that he is careful not to say that there is no threshold.

It is correct to say that there is one but that no one knows what it is. The U.S. will exceed it only of lenders (the bond market) determines that there is no possibility of repayment, a determination that bond holders will do everything to avoid making, as they have in the face of dire circumstances in Europe for years now, as it means taking a loss. They will take a wait and see in the next round of fiscal stimulus, and during that time we will be watching their decision making process very carefully for clues.

* Almost

[verdo]

Re: Bernanke:- We lost control

China acted as America's IMF during the AFC. Could it do so again if another crisis originates in the U.S.? If not China, then who can and will? What if the next global financial crisis originates in China? How might that crisis propagate to the rest of Asia, Europe, and the U.S. and what will the policy response be? One obvious result will be a rapid decline in demand for commodities. In the next article we try to map out a series of scenarios.

I'm not sure on this but I believe the IMF still has one of the cleanest balance sheets around, and combined with the printing power to create SDRs, they could essentially backstop the FED in the next crisis and help them push their yields down temporarily

P.S., you've all gotta love how high gas prices are despite all this deflation talk

[thriftyandboringinohio]

Re: Bernanke:- We lost control

Since we started in 1998, a long, scary list of risks to the economy and markets can at any time always be drawn up that justifies keeping a significant portion of one's portfolio in cash and gold. But at the same time an equally long list of encouraging developments can also be made.

"There's always an Arquillian Battle Cruiser, or a Corillian Death Ray, or an intergalactic plague that is about to wipe out all life on this miserable little planet, and the only way these people can get on with their happy lives is that they DO NOT KNOW ABOUT IT!"

[Mega]

Re: Bernanke:- We lost control

You know, you just know the FED is about to make an Awesome bad mistake...........
Mike

[think365]

Re: Bernanke:- We lost control

It's not that Yellen will not be allowed to use the controls, it's that there aren't any. There's just these two switches, one for each engine. Good luck!

p.s. If you smell smoke that's that's just the Li-ion batteries burning. Nothing to worry about. They are well contained.

Maybe Yellen has another more subtle, but tried and true, tool in the toolbox:

Crash land the plane in the middle of a deserted jungle with lots of deep over-growth during the Super Bowl followed by an American Idol marathon.

"If a plane crashes in the middle of a deserted jungle and there is no one to see or hear it, did it really crash??"

[GRG55]

Re: Bernanke:- We lost control

It's not that Yellen will not be allowed to use the controls, it's that there aren't any. There's just these two switches, one for each engine. Good luck!

p.s. If you smell smoke that's that's just the Li-ion batteries burning. Nothing to worry about. They are well contained.

Flight crews Robert Pearson & Maurice Quintal (Air Canada 143), Robert Piché & Dirk de Jager (Air Transat 236) and Chesley Sullenberger and Jeff Skiles (US Airways 1549) all demonstrated that a loaded commercial airplane can be safely landed with no operating engines.

Unlike these three examples, the advantage the Fed has is it can choose when to shut off the engines. Whether the members of the FOMC, including the new pilot-in-command after Bernanke retires, are capable glider pilots in an overgross airplane with a $4 Trillion payload remains to be seen. Maybe we'll discover all they have is a helicopter licence.

Just as an aside, it seems we Canadians factor big into disabled commercial airplane incidents. The first two above were Canadian pilots and aircraft, the US Airway incident was caused by Canadian geese. Maybe that's why the BoE hired former Bank of Canada Governor Mark Carney to try to pilot their overloaded aircraft to a "soft landing"

[Chomsky]

Re: Bernanke:- We lost control

[GRG55]

Re: Bernanke:- We lost control

Difficult to counter that.

Canada doesn't really have that much to recommend it.
Two seasons: Winter and mosquitos.
Gets so cold the words freeze as they come out of your mouth (which is why it gets so loud up here during the spring thaw).
When we aren't shovelling snow we have to spend our time raking all those damn maple leaves.
The national sport is supposed to be ice hockey but we are so bad at it the last time we saw the Stanley Cup was when Montreal won it TWENTY years ago (depending on who you talk to we're not even sure Montreal is in Canada).
No original economic ideas whatsoever, which explains why we just copied your real estate bubble as a prime driver of our economy.
And now we can't even give our oil away to you 'mericans.

Our Dollar is getting cheap again. Maybe we can entice you to come up here for vacation to fill our hotels and buy some polar bear trinkets?