| | | I've been a champion of watching what the FED does but feel it's more important to practically ignore what they are saying. All the talk about QE "aiding a weak economy" was just that, talk. The FED not only loaned money to banks for virtually nothing (ZIRP), they also told these same banks NOT to spend the money. Improve their balance sheets. Increase their loan loss reserves. Then write down those bad loans but still make sure that you ultimately have a stronger bank. The only way to do this was to borrow for nothing and NOT loan out a significant portion of what you are borrowing.
How does any of the above "improve GDP?" As far as I can see, it doesn't! So, when the FED was stating their views on the future, it was important to take them with a grain of salt, so to speak!
The study “Persistent Overoptimism About Economic Growth” by Kevin J. Lansing and Benjamin Pyle and published in the Federal Reserve Bank of San Francisco Economic Letter of February 2, 2015 systematically examined the Fed’s forecasting record. Specifically, Lansing and Pyle examined the real GDP projections made four times per year by the Fed that began in November 2007. Their overall conclusion reads: “Since 2007, Federal Open Market Committee participants have been persistently too optimistic about future U.S. economic growth. Real GDP growth forecasts have typically started high, but then are revised down over time as the incoming data continue to disappoint.” Even Mrs. Yellen in her December press conference admitted the Fed’s models were not working
Were they truly "not working" or was the FED's actual intentions different from their public statements? You be the judge!
The bad news in the oil patch, the mining industry and nearly the entire commodity complex is widely known. Take a good look at JPM and WFC earnings reports and you'll see huge rises in loan loss estimates. Here's JPM's:
The provision for credit losses was $1.3 billion, up 49%, due to reserve increases in the current quarter versus reserve releases in the prior year quarter, partially offset by lower net charge-offs. The reserve increases in the current quarter reflected an increase in wholesale reserves of $185 million, driven by downgrades, including $124 million in the Oil & Gas portfolio and $35 million in Metals/Mining Nearly half of the new credit loss reserves are related to commodities. This is bad news but taken in the context of a much stronger JPM balance sheet due to "fattening" (my wording) of the company from a couple of years of ZIRP, in no way would I say these are devastating.
With slower GDP growth and rising loses in the commodity sector, it's no wonder there are many analysts and market watchers who keep saying the sky is falling.
But is it really?
Once again, watch what the FED does, not what they say. They raised interest rates in the face of weak GDP and rising loses in commodities! Some are crowing that this is because the FED wants to force a recession and scale back the stock market. I say "Really"? Why would the FED want this? The likely response to my view is "the FED is clueless".
I can't help but come back to "watch what the FED does, not what they say".........
JMO
TO
(Thanks for the links to the new quarterly Hoisington Management economic overviews, Jon!! Great reads and very fair assessments, as I see it) |
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