Out of the Box: Broadening Your Horizons
It seems to me that there are several areas where people and institutions, alike, are not taking a broad enough view. One area is the Fed. The Fed is not some off-shore institution that operates independently from the government of the United States. “Independence” does not mean that it is not accountable for its actions. In fact, the four year term of office for the Chairman, and the fourteen year terms for the Presidents and Governors, are not some God given right. They were instituted by Congress and they can be changed by Congress and they can even be revoked by Congress.
The Fed was created by the Federal Reserve Act of 1913 and signed into law by President Woodrow Wilson. The mandates of the Fed have been changed several times, by Congress, since inception. Congress initiated the Fed, and Congress has the power, and the authority, to direct its actions. Also, it is not the “world’s central bank,” as it has been so often termed in the Press.
The Federal Reserve Bank was created to protect the interests of the United States. While it is true that they are “Independent,” as I said, that they can make their own decisions, they are not above the wishes of the government, the people. It is my opinion, therefore, that the President, a Senator, a Congressman, has the right, if not the obligation, to ask just what the Fed is doing, when they do not seem to be operating in the best interests of the country.
While there is often a reference to the mandates of the Fed, I think that the first consideration is the “purpose” of the Fed. I quote, below, from the Federal Reserve Act of 1913. The very first statement is the purpose and function of the Federal Reserve: “The Federal Reserve System is the central bank of the United States.”
The Federal Reserve Act declares:
“The Federal Reserve System is the central bank of the United States.
It performs five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest. The Federal Reserve conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy; promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad; promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole; fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments; and promotes consumer protection and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.”
Let me next address the “Yield Curve.” The Fed has not, to date, bought Treasury Bills. This means that the front end of the “Yield Curve” is distorted by the lack of their presence. They are absent in the Treasury Bill space and they are the biggest buyer of Treasuries on the planet. I expect this to change soon and the “Yield Curve” to resume its normal incline.
Remember that these people are the “only” people in the United States that cannot go to jail for counterfeiting. They are entrusted, in fact, to make money out of keystrokes, when necessary, and add it to the national supply. I would further state that historical observations are not accurate, as to an “Inverted Yield Curve,” simply, and exactly, because the Fed has not held such a dominant position before in the markets. Consequently, the “Inverted Yield Curve” is not signaling any sort of Recession, in my opinion.
The Fed was once part of the “Game.” They now are “The Game.” It is absolutely impossible for any financial institution, or money manager, to compete with the people that make the “Coins of the Realm.” All anyone can do, anymore, is try to get in front of them before they announce their next move.
The Fed has also indicated that they are about done with buying Agency securities. There is a pitfall here. This means that Agencies are going to widen out against Treasuries, when they step out of this room. This means that the funding for the Agencies is going to become more expensive and, therefore, that the costs of mortgages will rise unless, which I think will happen, that the Fed lowers rates once again and possibly even adds, again, to their balance sheet in the process.
The greatest defect, in analyzing the Fed, in my view, by American institutions, is that they only consider American issues. This was the case with the recent release of the Jobs Report. The market reaction was a very myopic, and incorrect, observation. The Fed is but one of a myriad of central banks, each representing a nation, or nations, as is the case for the ECB, and our central bank is entrusted to protect our country, especially when other central banks, and nations, are all protecting theirs.
The central banks of Switzerland and Japan are off buying sovereign debt, corporate debt, equities, Exchange Traded Funds and the like which not only props up their bonds markets, but their equities markets, with money created from nothing but the blink of some banker’s eye. Then the ECB is going to soon start buying more European sovereign and corporate bonds, as they have already indicated, and Ms. Lagarde, if confirmed as the next head of the European Central Bank, knows full well how to please her new Masters in Brussels and Berlin. Who knows, they may even follow their brethren into equities, if necessary.
All of these decisions will be mandated by the governments that the other central banks represent. Unlike the Fed, which does have a Congressionally mandated “Independence,” none of the other central banks have any kind of “Independence.” They are all held strictly to the dictums of their governments. Consequently, when the ECB does something it is because they were told to do it by Brussels and Berlin.
Any new move by the ECB, in my estimation, will “Force,” the Fed to respond. There will just be no choice, as the interests of the United States must be protected by our central bank. One more piece of information, from “Grant’s Book of Revelations,” is what will happen because of all of this.
It is just not lower yields heading our way but a vast reorganization of currency levels as our “Game of Thrones” with China widens out to include the European Union.
The nations of the world have found a way to pay for their budgets, their social programs, and their aspirations, without raising taxes or cutting their budgets. They have learned that they can accomplish all of these things by having their central banks create money, and buy financial instruments with them, and therefore drive the prices of bonds and equities as they desire. This will be the way of it for the foreseeable future, in my opinion.
This is not just a “Different This Time” moment, but a “Frigging, Unbelievable, Unreal, and Radical Departure,” from historical norms. When you have $15.1 Trillion in negatively yielding debt, including High Yield debt, and likely heading to $25 trillion soon, then you know that something, that was thought impossible for thousands of years, has taken place.
Once we thought that miracles only came from God. Now we have learned that central banks are also in on the game. Who knew?
Mark J. Grant
Chief Global Strategist, Fixed Income
B. Riley FBR Inc.
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