{"id":27851,"date":"2014-06-12T09:35:18","date_gmt":"2014-06-12T13:35:18","guid":{"rendered":"http:\/\/www.ino.com\/blog\/?p=27851"},"modified":"2014-06-12T09:35:57","modified_gmt":"2014-06-12T13:35:57","slug":"zirp-gains-more-attention","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2014\/06\/zirp-gains-more-attention\/","title":{"rendered":"ZIRP Gains More Attention"},"content":{"rendered":"

We have been talking about how there had<\/em> been no bubble in US stocks and how the economy is doing just fine.\u00a0 We have also been talking about how the bubble is in policy<\/strong> and that the economy and stock bull market have been created \u2013 yes, like Frankenstein\u2019s monster once again \u2013 out of this policy bubble.<\/p>\n

Enter economist Joseph LaVorgna of Deutche Bank\u2026\u00a0 Fed needs to start raising rates, top forecaster says<\/strong>.<\/p>\n

Will wonders never cease?\u00a0 As you may know, I read the financial MSM to get a feel for what the casual market participant is reading, what the majority is being told is the truth.\u00a0 Usually it is some combo of self-promoters and agenda (sometimes political) driven bulls and bears.<\/p>\n

\u201cThe economy is improving much faster than the Fed is willing to acknowledge, LaVorgna said in an interview. At the current rate of hiring, more jobs will be created this year than in any year since 1999.\u201d<\/em><\/p>\n

Exactly, and still they inflate.\u00a0 He correctly puts the focus on the financial (and national) disgrace called ZIRP as opposed to the theater surrounding QE\u2019s long term bond purchases.<\/p>\n

\u201cIn six months, the unemployment rate will be below 6% and the core inflation rate will be at 2%,\u201d he said. \u201cWe are way ahead of schedule. We\u2019re going to get to 5.2% or 5.4% a year ahead of schedule.\u201d<\/em><\/p>\n

\u201cThe Fed is behind the proverbial curve,\u201d he said. \u201cThe Fed should be raising rates.\u201d<\/em><\/p>\n

It\u2019s all that this corner of the interwebs has been hammering on for over a year now.\u00a0 If the economy is at all real, get rid of QE and<\/em> end ZIRP.<\/p>\n

\u201cI would have raised rates years ago,\u201d just enough to get the federal funds rate off zero after the emergency passed, he added. He argued that ultra-low rates may not be doing anything positive for the economy, anyway. \u201cIt\u2019s not about the cost of money; it\u2019s about the provision of credit,\u201d he said. <\/em><\/p>\n

It is about that provision (or better yet, attempted force feeding) and to this credit<\/em>, which goes right into the pockets of asset owners there is also a debit<\/em>, right out of the pockets of the dying breed that used to be a majority, savers.\u00a0 You know who savers used to be, right?\u00a0 They would be the ones who used to deploy capital at appropriate times, investing in opportunities provided by the economy\u2019s natural up and down cycles.<\/p>\n

Today there is one cycle; the BOOM\/BUST cycle.\u00a0 Right now we are on a BOOM.\u00a0 But the funny thing about cycles is\u2026 they cycle<\/em>!<\/p>\n

He\u2019s not worried that quicker-than-expected rate hikes will choke off the recovery. The level of interest rates is more important than the change in interest rates, he said. \u201cIf the Fed raises rates because the economy is better, that is a good thing.\u201d<\/em><\/p>\n

Yes yes yes.\u00a0 This refusal to even entertain a rate hike until some shady day out there in 2015 begs us to ask the question \u2018what are they afraid of?\u2019.\u00a0 Well,what are<\/em> they afraid of?\u00a0 The economy is fine on the surface of things.<\/p>\n

He\u2019s encouraged that Fed officials are at least talking about the risks of financial instability, but he\u2019s worried that the Fed is too focused on its main goals of maximum employment and price stability to pay attention to financial markets.<\/em><\/p>\n

The Fed can continue to put the pedal to the metal because gold is in a bear market and the outward signs of inflation are muted.\u00a0 This is the same Fed that did not see the credit bubble, the housing bubble, the tech stock bubble, the commodity bubble in anything resembling foresight.<\/p>\n

As for this \u2018price stability\u2019<\/em> thing, since it is a system of Inflation onDemand, what they are saying is that declining prices is a bad<\/em> thing because it would errr, undo the system.\u00a0 If the system is undone, they<\/em> are undone (cue Sgt. Barnes\u2026 \u201cif the machine breaks down, WE break down\u201d<\/em>).\u00a0 So inflation it is.<\/p>\n

LaVorgna hesitates to identify potential trouble spots in the financial markets. \u201cWe don\u2019t know for sure where the bubbles are,\u201d but he\u2019s confident that the stresses will reveal themselves once rates start to rise. Now is the time to prick those emerging bubbles before they get any bigger. <\/em><\/p>\n

The answer is right in front of you.\u00a0 The bubble, as we have been writing for too long now, is in policy.\u00a0 Why, just look at this\u2026<\/p>\n

\"dow.tbill\"<\/a><\/p>\n

Yes, it\u2019s this chart again with its stark reminder of why the Fed keeps the pedal to the metal.\u00a0 Now, as certain financial assets (read: stocks) start to threaten bubble-like behavior, the 5.5 year long ZIRP (green line above scuttling along the floor) is put into context, very disturbing context, against the backdrop of robust employment and economic acceleration.\u00a0 Here we reference the increasing \u2018Cost\u2019 component in the monthly ISM manufacturing reports.<\/p>\n

Unfortunately, I don\u2019t think there is a manageable way for them to back away from ZIRP.\u00a0 Sure, if it were to go as it usually does the market could continue to rise for a short time in the face of ZIRP\u2019s withdrawal, but an end to ZIRP would mark the beginning of the end for the bubble economy.\u00a0 The policy bubble is going to need to pop either sooner or later and I don\u2019t know about you but I find the one-way aspect of this situation pretty scary.<\/p>\n

The economy itself doesn\u2019t exhibit any major imbalances right now, he said. Inventories and sales are well-balanced, banks have recapitalized, and consumers haven\u2019t taken on excessive debts.<\/em><\/p>\n

Which is exactly where the bears (both economic and stock market) have gotten it wrong.\u00a0 Conventional analysts who were bearish on the economy were just not paying attention or did not look in the right areas (ref: our highlight of the Semiconductor sector in January of 2013, ratios like a rising palladium vs. gold as but one example).\u00a0 The stock market as well has presented technical targets to the upside since the big breakout in 2013.<\/p>\n

The article goes on to glad hand Mr. LaVorgna on his forecasting prowess among a host of other establishment gurus.\u00a0 I won\u2019t bore you with it.\u00a0 But nothing, absolutely nothing has changed in our analysis that sees the last refugees of the \u2018Great Recession\u2019 (handy nickname isn\u2019t it, with its implication of something that is well in the past?) being sucked back in by the seemingly endless run of ZIRP.\u00a0 The process is completing.<\/p>\n

Or as the poor pre-retirement couples in a disgusting John Hancock commercial put it\u2026<\/p>\n