Stupid Comments by the Fed (and Others, Too)

QUITE LITERALLY, this was an amazing week for stupid comments by Fed officials, spokesmen for the California Building Industry Association, former Fed officials, spokesmen for the U.S. Army, spokesmen for banks, and investment clubs. In aggregate, it was a totally stunning and possibly unprecedented performance. Let’s take a peek.

I will start off with one comment that is so blatantly stupid that it was instantaneously perceived as such by practically everyone. I intended to do an essay on this one item alone, but by the time I passed the comment around, three other blogs were already reporting on it. In case you missed it however, here it is: Federal Reserve Bank of Dallas President Richard Fisher said to CNBC on Wednesday:

“Where would the world be if Americans did not live out their proclivity to consume everything that looks good, feels good, sounds good, tastes good? We provide a service for the rest of the world. If we were running a current account surplus or trade surplus, what would happen to economic growth worldwide, and what would be the economic consequences? So I think we are doing our duty there.”

Wow, that is stunning! We provide a service to the world by consuming everything that “looks good, feels good, sounds good, tastes good.” Damn. That is quite a “service,” and to get paid for it, too. It’s a tough job, and since no one else wants it, I guess the United States will just have to bear the sacrifice and do it alone.

Let’s now take a look at what Mr. Alan Nevin, chief economist for the California Building Industry Association, had to say this week: “People have the ability to borrow against their homes. If times get tougher, they could borrow a sufficient amount to pay their mortgages.”

Wow. Another startling revelation! Borrow money to pay your mortgage. Gee, who woulda thunk that? Obviously many, given the cash-out refis we have seen lately. In any other week, the above comment would easily win hands down as the stupid comment of the week, but unfortunately, this was not any ordinary week. Mr. Alan Nevin had to compete and lose to Mr. Fisher. Such are the unpleasantries in life. This is kind of like losing to Tiger Woods on that incredible pitch shot in the Masters. Perhaps Mr. Nevin will be given another chance at the gold at a later date. On second thought, the perpetual-motion device he is describing is just so absurd that I am going to proclaim a tie and award both Mr. Fisher and Mr. Nevin gold medals for stupidity. Does anyone object?

Jumping on the stupidity bandwagon, the U.S. Army blamed parents for recruitment problems: According to The New York Times, “‘Parents,’ said one recruiter in Ohio, who insisted on anonymity, because the Army ordered all recruiters not to talk to reporters, ‘are the biggest hurdle we face.'” Amazing.

Rumsfeld looks silly every time he opens his mouth, and the latest time is no different. Here is Rumsfeld’s latest rant about China: “Since no nation threatens China, one must wonder: Why this growing investment? Why these continuing large and expanding arms purchases? Why these continuing robust deployments?” Note that this is coming from a nation that is spending more on “defense” than most of the rest of the world combined. Perhaps China fears us, or perhaps China is attempting to spend the United States into the ground, like we did to Russia. Then again, perhaps Rumsfeld is just clueless. BTW, isn’t Rumsfeld supportive of weapons in space? Hmmm. Is Mars planning to invade the United States sometime soon?

A poster on The Motley Fool had this bit of wisdom to offer the world: “The only reason anybody on Earth talks about ‘evil America’ is because it echoes the theme song of the press and the hysterical Democrat left.” I offered a free shot to that person at taking it back, but he repeated his comment to me in bold. Yes, readers, this is yet another startling revelation. It is quite staggering the power the “hysterical Democrat left” has over world politics. Apparently, this poster truly believes that U.S. Democrats can control the attitudes of the entire world, yet they can’t even win an election. Amazing.

OK, enough of politics. Let’s get back to the economy.

Mish, what are they saying about the yield curve? OK, that is a good question, so I am glad you asked. I have no fewer than three select comments to offer: Here is the first (from CNN/Money): “‘It really depends on when you get the flat curve,’ said Mark Vitner of Wachovia Securities. ‘Right now, with the low rates, I don’t see dire implications from a flattening yield curve.'” Wow. The knowledge imparted this week is simply staggering: “It’s different this time.” That’s a relief. I was sure starting to get worried about that flattening of the yield curve. I am relieved to know that it does not matter since interest rates are low.

The article continues:

“Mr. Vitner’s view was echoed by Bernard Baumohl, executive director of the Economic Outlook Group of Princeton, N.J. He said when the spread between long and short rates narrows but both remain below 4%, it’s ‘just not problematic for an economy with a low underlying rate of inflation and still healthy productivity growth. There’s still plenty of liquidity out there, and the cost of capital remains relatively cheap.'”

Not to be outdone on the implications of the yield curve flattening was former Fed Governor Laurence Meyer, who offered this advice: “Be careful how you interpret a very narrow curve, or even an inverted curve, in the context of structural forces that may have flattened it…It doesn’t mean the same thing that it used to mean.”

If you were not relieved by the comments of Mr. Vitner or Mr. Baumohl, I am positive you feel better now. We have no fewer than three confirmations that when it comes to the yield curve, “It’s different this time.” I do not know about you, but I will sure be sleeping easier this weekend, since things don’t mean what they used to mean.

Even though we are now headed into summer, I just caught a bad case of case of spring fever. Baseball is on my mind. The question I am most concerned with is this: What inning is it? Now, if you are a baseball fan, and perhaps even if you are not, you just might be wondering the same thing. In that regard, I am pleased to provide a set of opinions that will suit practically everyone.

Federal Reserve Bank of Dallas President Richard Fisher also told CNBC on Wednesday:

“‘I think we’ve room to tighten a little bit further,’ Fisher said, but, using a baseball analogy, added that the U.S. central bank is in the eighth inning of its tightening cycle and entering the ninth, and usually final, inning this month.”

On the other hand, Federal Reserve Governor Edward Gramlich, when asked about what inning we are in, had this to say: “I don’t know what inning we’re in, period.” Now what kind of wimpy opinion is that?

Then again, Drew Matus, an economist at Lehman Brothers, offered this: It is “still the sixth inning in our view, as we do not expect this one number will impact the Fed’s thought process.”

Fed Governor Susan Bies was clearly confused about what inning it is when she offered this statement: “At some point, we do believe that the 10-year Treasury will rise.” Now, that’s commitment for you. I am 100% sure she is correct. It might be today or tomorrow or 20 years from now, but I am sure the conundrum on low interest rates will eventually be resolved and that rates will rise. I am distraught, however, that she did not offer an opinion as to what inning we are in.


Meanwhile, I am very pleased to report that Fed Governor Stern is unfazed by relaxed credit standards. Like Susan Bies, he did not seem concerned about what inning this is. Here are his thoughts, as reported by Reuters:

“Shifting trends in home mortgages and the increased use of adjustable-rate terms are not a huge risk to banks, Gary Stern, president of the Minneapolis Federal Reserve, said on Thursday…’It sounded to me like credit standards have been relaxed. Some people expressed concern then and continue to express concern. There’s some smoke there, but is there a fire? Not yet, anyway.'”

Would you want your life in his hands if you were in a building billowing out huge clouds of smoke? What’s the moral of this story, anyway? Don’t worry about smoke until fire is burning your house down?

Is there more? Yes, of course. It seems that Mr. Fisher said we might go into extra innings if necessary. Wow. That’s a relief!

Could the April job numbers possibly have been more horrid? I was stuck in gloomy woe on those numbers, saying, “Woe, woe, woe,” until I saw analysis from Wachovia’s chief economist John Silvia, who had this bit of wisdom to offer: “Wages and unit labor costs rising and unemployment rates falling suggest we are running out of workers.” Wow. We are running out of workers. That is staggering. I think this is a national disaster. Then again, if we are running out of workers, why are we threatening China with 27.5% tariffs on grounds that they are stealing all of our jobs? OK, Mr. Silvia, I now have the dreaded CD (conundrum disease) on top of spring fever. This could be serious. Here is my question: How can China be stealing our jobs when we are running out of workers to fill them? Then again, that comment seems so blatantly stupid I must award it the silver medal.

CNBC was quite interesting on Friday. I hope everyone had a chance to catch the pearls of wisdom from a real estate investment club in L.A., in which members shared investment strategies reminiscent of the stock euphoria of 2000. Said one club member, “I am using negative amortization loans, and yes, it adds $10,000 to my loan, but the properties are appreciating $100,000-150,000.” Another comment was, “I quit my job that I had for 30 years and I am investing in real estate full time. I am not just investing, I am investing smart.” Gee, after a 20-year run-up in housing prices that has gone parabolic in the last couple of years, I am sure relieved to know that he is “investing smart.” I have another question: Does negative amortization with leverage sound remotely like margin?

The following message goes out to the Mogambo Guru, if by some reason of temporary insanity he should happen to be reading this blog. OK, Mogambo, if you are still reading this and are somehow still breathing after reading all the award-winning pearls of wisdom of the past week, I ask you kindly to take a swig of the strongest stuff you have before reading any further. My readers and your readers alike would hold me completely responsible if I posted something that caused you to keel over in fright, laughter, disbelief, outrage, disgust, or shock. This news is so shocking that any combination of the above is possible. That said, I have a duty to report the news, so here goes:

Federal Reserve Governor Gramlich reported today that nirvana was reached. Yes, I am sure you understand the implications, but I offer the following snips, from The Washington Post:

“‘To me, that is the ultimate test of price stability — do you think that $10,000 goes further this year than it did five years ago? I would argue in that sense we have achieved price stability,’ Gramlich said in answer to audience questions after a speech to a group of real estate editors.

“‘I would further tell you that we mean to keep at it, that other aspects of the economy don’t suffer when we stabilize prices in this sense, and that’s what we’re going to do.'”

Mr. Mogambo, I have been looking for signs of “price stability” nirvana for quite some time. Unfortunately, I have not found any. Since nirvana has now been reached, however, I am quite sure that a person of your stature can find some. Could you please run down your list of items and report to the kind readers of The Daily Reckoning your findings on “price stability” now that we have reached nirvana?

Here is my take: Even though we have reached nirvana, there sure seems to be an awful lot of conundrums running rampant. I would think that once nirvana were reached, conundrums would have long been resolved. Furthermore, it seems strange that even the Fed does not know what inning we are in, even though price stability has been reached. Could it be that the game being played is really football, not baseball? If so, perhaps the relevant question is not what inning we are in, but what quarter, and how much time is still left on the clock before this all blows up.

Mike Shedlock “Mish”  
June 09, 2005



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