Ingenuous Irony From the Federal Reserve Chair

Drowning money

It didn’t take long did it? Now the Bank of England, the Federal Reserve’s old partner in crime, is at it too. On Friday, the BOE’s Chief Economist, Andy Haldane, said he favoured delaying interest rate rises in the United Kingdom.

That, along with comments from the Fed’s James Bullard on Thursday, helped global markets to rally late last week. It’s having a nice effect on our market so far today too. It was just as well. The situation looked extremely dicey on Wednesday.

Given US markets haven’t even had a 10% correction, the coordinated comments have a whiff of panic about them. What…can’t markets even have a half-decent correction these days without central bankers wetting themselves in panic?

While the minions were trying to hold things together late last week, boss Janet Yellen was inadvertently making a pretty decent argument to end the Federal Reserve altogether. She just didn’t know it.

In a speech on ‘economic opportunity and inequality’ in Boston on Friday, Yellen came out with some clangers. Unfortunately, most observers missed the irony of some of her comments.

Yellen drew heavily on data collated from the Fed’s Survey of Consumer Finances, which began back in 1989. Take it away, Janet…

By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then.

Hmmm…the past 100 years you say? The Federal Reserve came into being in 1913. A coincidence, do you think?

Not convinced? Give us some more stats then, Janet…

After adjusting for inflation, the average income of the top 5% of households grew by 38% from 1989 to 2013. By comparison, the average real income of the other 95% of households grew less than 10%.

The lower half of households by wealth held just 3% of wealth in 1989 and only 1% in 2013.

That’s interesting. Go on…

The average net worth of the lower half of the distribution, representing 62 million households, was $11,000 in 2013. About one-fourth of these families reported zero wealth or negative net worth, and a significant fraction of those said they were ‘underwater’ on their home mortgages, owing more than the value of the home. This $11,000 average is 50% lower than the average wealth of the lower half of families in 1989, adjusted for inflation.

Wow! The average net worth of 62 million US households is just $11,000…half of what it was back in 1989, despite 25 years of (mostly) economic growth?

Is it another coincidence that just two years before 1989 the Federal Reserve embarked on a policy of full-blown central banking activism? In 1987, Alan Greenspan had just taken the helm from the last great central banker, Paul Volcker, when ‘Black Monday’ hit, on the 19th of October (nearly 27 years ago to the day).

Greenspan panicked. He promised the market liquidity and support and whatever else he could. The Fed hasn’t looked back since. From that day on, it’s been the market’s socialist tormentor and benefactor…creating crises and then trying to solve them by throwing money at the problem.

And where does the money end up? In the hands of the already relatively well-off, which is why Janet Yellen’s statistics look so horrible.

The irony of a new Fed Chief pointing all this out is particularly…rich. Actually, it’s nauseating. If you didn’t know any better you’d think she was actually having a laugh. It’s either ingenuous or the work of the devil.

In truth, I think it’s genuinely ingenuous on Yellen’s behalf. You don’t set out to become the world’s biggest do-gooder by being a hard-nosed realist. The devilish operators are behind the scenes, playing poor Yellen like a marionette.

Meanwhile, China’s central planners are struggling to get to grips with the havoc they have wreaked too. Reuters reports that the People’s Bank of China plans to ‘pump’ 200 billion yuan into the banking system as worries about the economic slowdown increase. Will it do anything?

Last month, the PBoC injected 500 billion into the banking system. Did that do anything? Well, total credit growth did rebound in September (to 1.05 trillion yuan); however, it was still lower than analysts expected.

Despite the Chinese economy continuing to hang in there, or at least give the appearance of doing so, the damage to the Aussie iron ore industry is (and will continue to be) massive.

The price is in a deep bear market with no signs of improving. The Australian Financial Review website reports today that BHP doesn’t see the price rising above US$100/tonne again for a long time.

This new low price environment is turning industry players on themselves. Last week you saw West Australian Premier Colin Barnett have a go at BHP and Rio’s expansion plans. He’s angry because his government looks clownish for forecasting US$120/tonne iron ore prices this year. His budget is in tatters. He thinks ramping up expansion in a falling price environment is dumb.

It’s not if you’re the world’s lowest cost producers. Which is why BHP and Rio continue to expand production. They know it will hurt them in the short term as more supply pushes prices lower, but long after all the high cost producers have gone to the wall, they will still be churning out the red dirt at low costs.

You couldn’t say the same thing about Fortescue, which is why boss Nev Power is also having a go at the big two miners. The Age reported on the weekend that:

Mr Power said on Friday morning that Rio and BHP Billiton’s management teams could be at risk if their massive iron ore expansion strategies fail.

"Poor investment decisions in the past have inevitably lead to changes of management and all of us in corporate life need to stay very focused on long-term shareholder returns," Mr Power said. "There is no point continuing to expand just because you are $1 cheaper than the guy next to you."

Good try Nev. But whatever you say, Rio and BHP are going to crush you. And they’re much more than $1 cheaper than Fortescue. Rio iron ore boss Andrew Harding told him as much a few hours later…

I can see that Rio is a producer of much higher quality and significantly lower cost of production so I can understand why Nev is actually a little distressed and possibly even panicking."

Distressed and panicking…a bit like broader asset markets last week. Well, you’ve got a central banking sponsored reprieve from distress and panic for the time being. How long it lasts will go a long way towards telling you just how worried and fragile markets are right now.


Greg Canavan+
For The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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2 Comments on "Ingenuous Irony From the Federal Reserve Chair"

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slewie the pi-rat
slewie the pi-rat
2 years 7 days ago
yes. the worry is being cranked up to 11. now the tapering-is-tightening-&-we’re-DOOMED crowd is out trying to act credible. good for a laugh. all the wing-nuts who have been talking about assets being mis-priced for the last year or more are now deeply concerned about asset prices falling, which i think is hilarious. don’t you? people who have made careers as gold touts, warning of the evils of incipient, guaranTEED inflation are now pontificating about how the banksters could NEVER allow deflation. L0L!!! people who have been hallucinating a credit bubble from hell are now convinced a credit contraction MUST… Read more »
2 years 6 days ago
My understanding is that the money supply is being inflated and it is pretty much guaranteed that this will continue. The money supply is also being destroyed at the same time as the debt “assets” disappear through default. From my layman’s perspective it would seem as if this process is continuously pouring capital (i.e. destroying the seed stock) to maintain an illusion. I don’t think that gold is going to grow when you bury it either though. It appears to me that if you’re not worried you don’t understand the problem? But I could be wrong because you seem to… Read more »
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