Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
-Excerpt Federal Reserve Statement
September 18, 2013
Earlier this week the Costa Concordia was lifted off its side in an exhausting and complicated procedure that will now allow the former cruise ship to be moved and sold off for scrap metal. Watching the delicate procedure, one couldn't help but wonder if Ben Bernanke is steering our economy too close to rocks and sooner or later may upend the entire nation on its side with a bloated Fed balance sheet, runaway inflation and lost faith in the ability of money printing to bring happiness or stability.
It's a good analogy but there's an even better recent tragedy that serves as a parallel between reckless Fed policy and the misguided arrogance of Ben Bernanke.
In March 1976, a third reactor was turned on at the Fukushima Nuclear Power Plant to much applause and great hope. Its earthquake-proof frame was applauded, and its young architect, Uehara Haruo, an academic like Ben Bernanke and the former president of Saga University, admitted risks of a China Syndrome-like meltdown when the accident happened, and Tokyo Power Company covered up obvious problems. I'm not sure if he ever came clean about the initial arrogance of the design, but he was clear and honest when the incident occurred.
Yesterday, Ben Bernanke had a chance to be clear and honest but stayed with a program based on his theories about monetary policy instead of an economic reality riddled with obvious problems. At some point one must consider if the risks are greater than the rewards, which for me is a no-brainer as there would be no central bankers in my perfect world. There would also be no bailouts of gargantuan banks followed by lax accounting standards that allow for paper profits. Be that as it may, there is a Fed and they have goals.
The Ben Bernanke Fed is desperate to jump start a sustained economic recovery that's a lot more than "things are getting better." To that extent Bernanke said early in his press conference that fiscal policy was hurting the economy, which means the Fed has to do even heavier lifting than normal. In other words an organization that can create money out of thin air is pushing to create the most cash it ever has. This brings me to one of the reasons I thought there would be a dollop of tapering. The risks are huge ... the Fed balance sheet is a ticking time bomb.
Having pointed these things out, I would say trying to time when or even if this time bomb goes off is a folly. Unless you are a doom and gloom person making the rounds on television and radio and make money writing end-of-the-world books, you have to be an investor. The irony is that when there are implosions in the economy, those with the most money, not those with deepest bomb shelters, are the ones that survive and are positioned to take advantage.
Timing Meltdowns
It took 35 years for a worst case scenario to play out at the Fukushima despite lots of warnings. Some would say it took a Black Swan for the incident that took 18,000 lives to occur. It will not take that long or a series of huge unique failures before the Fed's balance sheet suffers a China syndrome, but I just don't see it happening soon nor should anyone base their long term future on living in fear over the next crash. It is rare that this happens out of left field, and in fact, we often see the tsunami coming ahead of time.
In the meantime, it's clear Fed policy has become ineffectual. To that point it was good to see the written statement mention a reverse in course based on not only economic parameters but also on efficacy and costs of such purchases.
In medicine a new drug is tested first for efficacy and once prescribed, monitored for over use and net cost benefits. As Rick James would say, Fed money printing is a hell of a drug.
Yesterday's Q & A session was livelier than normal as Bernanke had to fend off questions about why he didn't taper, why he's taking such risks and what he's looking for. In his words still waiting for policy to have a "substantial "impact rather than the "significant" impact he sees from the roof of the imposing Federal Reserve building. It's clear now Bernanke spoke out of school earlier in the year when discussing tapering.
The Fed lost control of interest rates resulting in a spike that may have hurt the housing rebound. Now it is hoped real rates start to slide and get back in sync. Bernanke also played it tough saying the Wall Street tail doesn't wag the Federal Reserve dog hence not tapering.
Teaching Self Made Billionaires a Lesson...
In 1966 a kid drops out of Kalamazoo College after one year and heads off to California to become a movie star. While waiting for his big break, he gets a job with a local toy manufacturer. After two decades in the business he decides to strike out on his own, so he mortgages the house and uses every penny of savings to start Ty Inc. Seven years later Ty Warner hits the jackpot with Beanie Babies, which become a worldwide phenomenon peaking at $700.0 million in annual sales. He takes his new fortune and begins to buy luxury hotels and properties.
Over the past several years Ty Warner has become as famous for his philanthropy as his Beanie Babies having given millions to the Andre Agassi Foundation, the Red Cross, and other charities and causes (including one million Beanie babies for the children of Iraq) but his most famous gift was $20,000. Last year Warner got lost driving around Santa Barbara when he pulled into a lot to ask a woman for directions. They began to talk and he learned she was in that lot trying to raise money for stem cell therapy to treat her kidney failure.
Turns out a litany of health issues made this her last resort, but the procedure was done outside the United States. Warner wrote her a check for $50 and said he would give more. Not long after Jennifer Vasilakos received a letter and a check for $20,000 and wrote about it in her blog:
"It was the type of letter you keep forever, and accompanying it was the check. A check that could change my life in an instant. Streaming tears of relief and amazement fell uncontrollably from my eyes, as I walked out of the room back towards the exit. I was flooded with indescribable emotion."
Yesterday Ty Warner admitted to tax evasion on a Swiss bank account.
For his 2002 tax return he reported $49.0 million in total income leaving out $3.1 million earned in a secret Swiss account. Tax evasion is a crime, there is no doubt, but the penalty leveled at Warner is in many ways a greater crime. The IRS is making Warner pay $53.0 million 1,600% more than the non-reported gains in his secret account. This sends a message, in fact, it sends multiple messages. The war on the rich has no Geneva Convention of its own. The need to teach a lesson permeates all facets of policy in the White House, but nowhere greater than punishing the success to the point of vilification.
Warner is a big boy and can pay the money (according to Forbes his net worth is $2.6 billion) but that doesn't make it egregious and mean-spirited.
The punishment goes after a pound of flesh from any person aspiring to be wealthy. The goal is an expanded middle class and those that dream higher better write campaign checks or come under scrutiny and vitriol from the White House. I was never a fan of Beanie Babies, but learning of his determination to make a dream come true and his generosity to others today, I am a Ty Warner fan. I can only hope the public relations aspect of this hash punishment doesn't sway the millions that found fun and comfort in his products and relief from his gifts.