Is the Bernanke Put Kaput?

As Barry suggests, have we just seen the end of the Bernanke put? Based on the way markets are trading today it would appear Ken Rogoff was right that Bernanke doesn't have the stock market's back.

However, in all likelihood Soros is right about how policymaking powers-that-be will be forced to bailout Too Big To Fail banks should the financial system begin to teeter again. In which case the only real question is for how long can the current central bank shell-game be sustained in a low-to-no growth economic environment?

No one -- not Ben Bernanke, not Alan Greenspan, not Milton Friedman if he were alive, nobody -- knows for sure just how much more room the Fed's balance sheet has before non-negligible inflation kicks in. However, former Fed Chair Paul Volcker for one is starting to get nervous.

Federal Reserve Total Assets ($s Trillions)

(click to enlarge)

Continue reading the full article at SeekingAlpha here.

Video: Jim Grant - 'We Traded the Gold Standard for the PhD Standard'

Interview with Jim Grant on Bernanke's press conference today, the coming of QE3, and why the Federal Reserve should "be run by someone with a degree in unintended consequences" after the break.

Goldman Sachs Says Fed's Next Money Printing Move is Imminent: "No Point in Doing Anything Less Than $1 Trillion"

Goldman Sachs chief U.S. economist Jan Hatzius yesterday said that the Fed is going to have to eventually print more money to tune of $1 trillion+.

In other words, the Fed's recently announced 'QE Lite' simply won't cut it. Hatzius figures are in line with estimates for QE 2.0 (the term that has become attached to the next massive round of Fed money printing) that I've been pointing towards for awhile.

In terms of the timing of QE 2.0, Goldman Sachs Chief Global Economist Jim O’Neill said "September might be a little bit soon, but by October I would say for sure if the data carries on being as disappointing as it’s been."

Given that market confidence is clearly deteriorating, why won't the Fed act sooner? I've recently wrote about my ideas on timing here. Ken Rogoff, the Harvard economist and author of the only economic history bestseller This Time is Different, recently appeared on Charlie Rose. He suggests that the Fed is hesitating because they're "nervous about overshooting". Aiming for 3% inflation, the Fed may miss their target badly and wind up with 30% hyperinflation. However, Rogoff states the "Fed will have to take that chance".

The U.S. dollar has held its ground so far, but concerns are rising about ongoing record budget deficits and what the government will do about the massive mortgage market problem that is Fannie and Freddie. The terrible housing figures are coming in spite of record low mortgage rates, housing prices 33% off their peak, and federal government subsidized mortgages for even Manhattan condos that require only 3.5% down payment. Perhaps most importantly, the now all but certain QE 2.0 makes the future value of the dollar anything but certain.

From an investment perspective, any move by the Fed to print more money is bullish for gold.

The Yen: A Little Less Conversation, A Little More Action?

The value of the yen just hit its highest level against the U.S. dollar since Nov. 27 at 85.32, which is close to its 15-year high of 84.82.

While recent news from Japanese exporters has been relatively positive, a higher value yen could threaten Japan's fragile economic recovery. A strong yen makes the price of Japanese exports less attractive in key foreign markets, such as the U.S.

In the past simple jawboning by Japanese officials has proven effective at 'talking down' the yen. On cue Yoshihiko Noda -- Japan's eighth Finance Minister in the past three years -- said that he is “closely watching” the currency market and that the yen’s current movement “is a little one-sided”. And as I write the yen is trading off a bit to 86.24.

However, given the serious discussion of QE 2.0 or QE Lite in the U.S., will talk alone be enough to keep the yen from rising this time?

Some Japanese exporters already appear to be looking for 'a little less conversation, a little more action' from the Bank of Japan. Yesterday Nissan Motor Co. Chief Operating Officer Toshiyuki Shiga said "with the current rate there would be an impact on our orders for export. I hope each country will cooperate to minimize the impact of the yen’s strength, and I hope the government (Japanese) will make such efforts.”

The last time the Bank of Japan intervened in a significant way was in 2004. I recently interviewed Axel Merk, portfolio manager of the $500 million Merk Currency mutual funds. Merk contrasted the Bank of Japan's currency prowess with the recent ineffectual efforts of the Swiss National Bank (SNB), which failed miserably in its attempts to halt the rise in the Swiss Franc against the Euro. Unlike the SNB, the Bank of Japan can "do real damage" to the value of the yen. Earlier this year Merk removed the yen from his list of "hard currencies" when it appeared the government might finally get organized enough to put pressure on the Bank of Japan to devalue the yen.

I wouldn't expect Bank of Japan intervention unless the yen breaches the 84.83 level for a sustained period. For investors, there are several yen ETFs to choose from.

In the meantime, here's Elvis:

The Fed's Balance Sheet: More Room to Grow?

There is a lot of speculation and debate about what will happen to the Fed's balance sheet going forward. Recently St. Louis Fed President and FOMC voting member Jim Bullard has called to expand it further. Tonight the WSJ reports that the Fed is contemplating using the "cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually". This idea has been dubbed 'QE lite', as opposed to full 'QE2'.

Sometimes a good graphic really helps to put things in perspective. Courtesy of the WSJ's Real Time Economics blog is this interactive Federal Reserve assets chart.

The chart headline refers to the Fed's "balance sheet". But in small print you read that it is actually charting just the Fed's assets. The full Fed balance sheet would also include liabilities, which are not shown. (If you're curious about what the Fed's liabilities are comprised of take a look at the green paper in your wallet or purse, and you can learn more here and here.)

Why are the Federal Reserve's assets important? Simply put, the Fed's assets equal the money printed by the Fed. In other words, for an asset like a U.S. Treasury bill to wind up on the Fed's balance sheet it must be purchased by the Fed. And the money to purchase that Treasury bill is created (printed) by the Fed. Welcome to the only place in America where in fact money grows on trees!

Looking at the chart two things jump out:

1. The parabolic 'hockey stick' curve. Fed assets shot upwards from roughly $800 billion pre-financial crisis in 2007 to today's $2.3 trillion.
2. The increase in the different types of assets held on the balance sheet

Prior to the crisis the Fed's balance sheet was pretty simple: basically $800 billion in U.S. treasury securities. Now it contains everything from former AIG and Bear Stearns junk assets, to loans to other government's central banks, to who knows what until the one-time Fed audit is completed (see below video).

Looking at the value of the U.S. Dollar and U.S. government debt, so far the market's reaction to the the tripling in size of the Fed's balance sheet has been relatively benign. But can present values be sustained through another round of Fed "quantitative easing"?