Financial Review

Financial Review for Thursday, January 25, 2012

DOW +81 = 12,756
SPX + 11 =1326
NAS + 31 = 2818
10 YR YLD -.06 = 2.01
OIL +.79 = 99.74
GOLD  + 44.40 = 1711.80
SILV + 1.22 = 33.37
PLAT + 35.00 = 1585.00

The Federal Reserve will leave interest rates unchanged. That is the biggest non-news event of the day, but wait, there’s more! The Fed wrapped up their FOMC meeting with a new twist, they issued an official inflation target of 2 percent and they published individual policymakers’ forecasts for the Fed funds rate. A 2 percent target for inflation isn’t really new, and it wasn’t really on target because the rate for 2011 was 3 percent. The individual policymakers offered a wide range of views; three policymakers expect rates will need to rise this year and two others don’t think rates will need to rise until about 2016. The consensus seemed to be that rates should stay unchanged until the end of 2014.

The Fed says the economy faces “significant downside risks” but it offered little to suggest it was close to launching another round of bond-buying to prop up growth. It did say, however, that it would maintain a “highly accommodative” monetary policy stance. The statement also dropped a reference saying the Fed was monitoring inflation and inflation expectations.
Let’s break this down a bit further; the biggest change was that the Zero Interest Rate Policy has been unofficially extended from 2013 to 2014; this could be considered dollar negative; meanwhile, there was no announcement on QE3 – no surprise; we weren’t expecting an announcement but that doesn’t mean we won’t see accommodation. Fed Chairman Bernanke has called for more aid for housing. President Obama proposed a program for refinancing during last night’s State of the Union Address. The proposal will likely be dead on arrival for this year and that means the Fed will need to take a back door approach. Whatever the path, the effort may damage investors in government-backed mortgage bonds by more quickly paying off securities with high coupons and limited default risk, but it would be good news for holders of other home loan securities and banks. The Fed would like fiscal policy to juice the housing market but there’s still plenty they can do with the tools in the monetary policy tool belt.
I  know we’re going fast here, but if you need to review, you can go to and listen to the archives later. Here’s the bottom line – the Fed will try to stimulate the economy and they’re not worried about inflation. We didn’t hear hardly a word about the Euro-crisis from the Fed, or for that matter in the State of the Union speech, and maybe the Fed is keeping their ink dry in the event of a Euro-implosion, but I think they’re going to do back door stimulus to try to juice the economy for an election year.
By the way, did you hear the State of the Union last night? There was one line that caught my attention but apparently skipped right over the talking heads today. President Obama said: “if you’re a big bank or financial institution, you are no longer allowed to make risky bets with your customers deposits. You’re required to write out a “living will” that details exactly how you’ll pay the bills if you fail – because the rest of us aren’t bailing you out ever again.” The implications of that promise are huge because we know the big banks like Bank of America are more than willing to put customer deposits at risk, but now the Too Big to Fail Era is over, finished, dead. This means we should see a change in banking behavior – at least in theory we should see a change in behavior. If we truly aren’t bailing out the big banks ever again, then the living wills should include provisions for breaking up the big banks into smaller banks, because if the banks remain big, their potential failure continues to present a systemic threat. But I didn’t hear anything about breaking up the banks. I didn’t hear anything about reinstating Glass-Steagall. I heard about a Financial Crimes Unit and a special unit of federal prosecutors but 3 ½ years after the fact we still haven’t seen perp walks; and even the village idiot knows there has been fraudulent activity by big banksters; and even I know that justice delayed is justice denied; and even my dog knows the $25 billion dollar multi-state settlement between the states’ attorneys general and the big bank mortgage lenders is just another sweetheart deal for the banks.
It was interesting to hear that we’re not going to bail out the banks when the very next day the Fed announces it will continue its Zero Interest Rate Policy.  The Fed lends money for nothing and then allows the banks to park the money with the Fed and collect free money. I want that gig. What is ZIRP if not a bailout of the big banks?
Actually, there were several very important lines in last night’s speech. I won’t attempt to replay them all here. You can go online and read the speech or watch it – and you should. Politics is an important part of the economy and our personal finances. How you viewed the speech is likely a function of your political affiliation. I get it. Last night, President Obama hit a home run – as speeches go.  The speech rebuffed all the criticisms against him, it especially looked like a preemptive strike after watching the republican response. The speech writer is due a bonus. And then to put an exclamation point on it, this morning we hear that Leon Panetta and the President had pulled off a Navy Seal mission to free prisoners from Somali pirates. And then to put another exclamation point on it, this afternoon, Tim Geithner said he will stay on through the end of the year but he doesn’t expect to be around for a second term. It’s like a banana split with whipped cream and a cherry on top and then another cherry on top. The President was aggressive; he was positive; and he was populist; and he can present a really great speech; and he did. And much of what we heard will face opposition and might not happen. And it is still a long way to the election. And so much can happen.
The woods are lovely, dark, and deep,
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.
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