CARNAGE
by ilene - November 16th, 2010 9:51 pm
CARNAGE
Courtesy of The Pragmatic Capitalist
The QE trade is unwinding in dramatic fashion as the market slowly realizes that QE is not in any way inflationary. As I mentioned last week the smart money markets (fixed income and FX) were foreshadowing this as early as last week. The air pocket created by Ben Bernanke created an incredible trading opportunity for investors who weren’t blinded by confidence in the Federal Reserve. Just two weeks ago I said:
“Would add (to shorts) into any move over 1200. Would LOVE to see 1220″
My position is that the market is misinterpreting the economic impact of QE in the long-term. My market position has always been that we could rally to these levels and that at these levels the market has become overly optimistic. If I am wrong I will lose some money and move on. It’s part of the business.
Like clockwork the market touched 1220, bounced and sold-off. The carnage across markets is broad. The only things rallying are volatility, USD and US treasuries. In essence, the leveraged QE inflation trade is collapsing. You can thank Ben Bernanke for this. When you create distortions in the market you get volatility, uncertainty and ultimately a collapse in prices. Keeping market prices “higher than they otherwise would be” is not a recipe for economic growth.
The most worrisome development is dissension inside the EMU. Austria is now threatening to withhold their contribution to the Greek bailout unless Greece can prove that they have fulfilled their requirements for aid:
“The cost of insuring against default by Greece and the premium investors demand to hold the country’ bonds rather than lower-risk German Bunds jumped on Tuesday after Austria said Athens had not met aid commitments.
Five-year credit default swaps were 100 bps wider on the day at 950 bps, according to monitor Markit, while the 10-year yield spread between Greek and German government bonds was 15 bps wider at 923 bps.
Greece has not fulfilled commitments for its European Union-backed aid package, Austrian finance minister Josef Proell said on Tuesday, adding that Vienna had not yet submitted its contribution for December.”
That’s not the only concern in the markets. Municipal bonds in the US continue to crash as a market that was priced for perfection now begins to price in some risk. Commodity markets are…
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DiggUNDERSTANDING THE MECHANICS OF A QE TRANSACTION
by ilene - November 9th, 2010 4:56 pm
UNDERSTANDING THE MECHANICS OF A QE TRANSACTION
Courtesy of The Pragmatic Capitalist
Some people want you to believe that the Fed just injected the economy and stock market full of
Before we begin, it’s important that investors understand exactly what “
This is a crucial point that I think a lot of us are having trouble wrapping our heads around. In school we are taught that “cash” is its own unique asset class. But that’s not really true. “Cash” as it sits in your bank account is really just a very very liquid government liability. What is the difference between your checking and savings account? Do you classify them both as “cash”? Do you consider your savings accounts a slightly less liquid interest bearing form of the same thing a checking account is?
What is a treasury note account? It is a savings account with the government. So now you have to ask yourself why you think cash is so much different than a treasury note? What is the difference between your ETrade cash earning 0.1% and that t note earning 0.2%? NOTHING except the interest rate and the duration. You can’t use your 13 week bill to pay your taxes tomorrow, but that doesn’t mean it isn’t a slightly less liquid form of the exact same thing that we all refer to as “cash”. They are both govt liabilities and assets of yours.…
Just in case you were planning to eat next week…
by ilene - November 8th, 2010 4:59 pm
Just in case you were planning to eat next week…
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Courtesy of Joshua M Brown, The Reformed Broker
The next chapter in the quantitative easing drama takes place in the ag commodity neighborhood.
Over in Britain, the Guardian posted a full-scale freakout piece tying in Bernanke’s policies to a sharp spike in food costs…
UK food prices were 9.8% higher last month than a year ago, the biggest annual increase since October 2008, according to the Office for National Statistics. Imported food prices climbed 4.5% on the year, the fastest rate since October 2009, pushing up the price of bread and margarine. Prices are likely to be pushed higher in coming months, with refined sugar reaching a record of $783.90 a tonne today.
Greg White over at Clusterstock has a very worthwhile slideshow (can’t believe I just wrote that phrase) illustrating the food cost spike by commodity. Corn, for example, is just completely absurd and very scary if you are in the business of feeding large quantities of animals (or addicted to Crackerjacks) :
The agflation beat goes on.
Sources:
US Accused of Forcing Up World Food Prices (Guardian)
Here’s the Massive Commodities Surge etc. (Clusterstock)
Read Also:
Food Price Inflation No Longer Theoretical (TRB)
Pic credit: Jr. Deputy Accountant
DISINFLATION WITH A HIGHER RISK OF DEFLATION THAN INFLATION
by ilene - November 1st, 2010 6:53 pm
DISINFLATION WITH A HIGHER RISK OF DEFLATION THAN INFLATION
Courtesy of The Pragmatic Capitalist
David Rosenberg had some succinct thoughts on the continuing
There is no more significant source of inflation than the U.S. labour market and we found out on Friday that total employment costs slowed to just +0.4% in Q3 and the YoY trend is extremely tame, at +1.9%. Wages came in at +0.3% sequentially and just +1.5% on a YoY basis.
We can understand the temptation to believe in the inflation story because of what the CRB index has been doing, but our advice is to resist that temptation and remember what we were talking about, quite unexpectedly by the way, six months after oil hit $140/bbl back in 2008. Deflation.
In many cases, pricing power is hard to achieve and so the bump in commodity costs serves as a margin squeeze as opposed to a sustained source of final stage inflation. For real-life examples as opposed to the data, what did the NYT have to say about Colgate’s profit results? This — “Colgate’s revenues in the United
States , which produces 19% of its sales, grew 2%, while the company sold 3% more products. Price cuts reduced earnings in the United States by 1.5%.”
This is important because a lot of investors prefer to just look at commodities as evidence of impending U.S. inflation. This is partly misguided for several reasons. First of all, there are many variables influencing commodity prices at any given time. Currently, I would attribute the move in commodities to Asian strength (there is very real inflation in much of Asia ex-Japan), fears of U.S. “money printing” and the rise of the commodity investment class. Except for the case of “money printing” (which I believe is largely the result of misunderstanding how our monetary system works) there remains little worry of these variables influencing U.S. consumer inflation. As Mr. Rosenberg highlighted, there is only so much commodity price inflation that a weak U.S. consumer will allow (reference 2008).
The rise of the commodity investment class has largely created a hedging mechanism for investors and this component of the commodity price increase represents a “bet” that inflation is coming. Gold…
Burning the Food Supply
by ilene - October 30th, 2010 8:20 pm
Burning the Food Supply
Courtesy of Joshua M Brown, The Reformed Broker
Farmer Brown here…if no one else is going to tell this story, then I might as well.
We do some stupid stuff here in America – playing ultimate frisbee on skis, deep-frying Oreos, calling in to vote for televised dance show contestants…I could go on and on.
But of all the stupid things we do, one of the most dangerous is this ethanol nonsense, in which we gleefully burn up our corn supplies. For very little in the way of environmental impact I might add.
First, look at the December 2010 corn contract, then I’ll give you some insane stats on the demands of ethanol:
You wouldn’t believe it, but according to the most recent estimate from the USDA, corn use for ethanol for the 2010-2011 corn crop will be 37 percent of the projected total harvest. More than a third of our corn supply will be refined for energy use. We’re talking about 4.7 billion bushels of the corn that would normally go to animals as fodder and to our own diets.
And while yields and production are up, corn races to ever higher prices. There’s a good reason for that – industry experts say that we now need to produce 13 billion bushels each year just to keep prices restrained.
The stats above are mind-blowing and to me they represent the bull case for agriculture stocks and commodities in general.
They also represent a society that has become oblivious to the danger right in front of its face. I believe that resource competition between the developed and emerging nations is a given for the coming decade. While many believe this competition will center around oil, I’d be more concerned about the global demand for more and better food.
One of the most important determinants of animal protein prices is the corn fodder that supports production. And we’re mixing this critical element of the food supply into our gas tanks.
One might ask "but if it comes down to it, we can adjust in time, right?"
And the retort might be "if we’ve learned anything from the economic earthquakes of the recent past, it’s that we almost never adjust until it’s too late."
Stupid, stupid, stupid.
h/t David D
WELCOME TO RICHARD FISHER’S “DARKEST MOMENTS”
by ilene - October 26th, 2010 1:28 am
WELCOME TO RICHARD FISHER’S “DARKEST MOMENTS”
Courtesy of The Pragmatic Capitalist
I wish I could say that I am surprised that Ben Bernanke’s
“In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places.”
Welcome to your darkest moments Mr. Fisher. The one thing we can positively confirm about QE2 is that it has not created one single job. But what has it done? It has caused commodities and input prices to skyrocket in recent months. Reference these 10 week moves that have resulted in the Fed already causing “mini bubbles” in various markets:
- Cotton +48%
- Sugar +48%
- Soybeans +20%
- Rice +27%
- Coffee +18%
- Oats +22%
- Copper +17%
Of course, these are all inputs costs for the corporations that have desperately cut costs to try to maintain their margins. With very weak end demand the likelihood that these costs will be passed along to the consumer is extremely low. What does this mean? It means the Fed is unintentionally hurting corporate margins. And that means the Fed is unintentionally hurting the likelihood of a recovery in the labor market.
How to Kickstart the Economy
by ilene - October 21st, 2010 4:18 am
How to Kickstart the Economy
By MIKE WHITNEY, originally published at CounterPunch
On Friday, Fed chairman Ben Bernanke made the case for a second round of quantitative easing (QE) claiming that inflation is presently "too low" to achieve the Fed’s dual mandate of price stability and full employment. By purchasing long-term Treasuries, Bernanke hopes to lower bond yields and force investors into riskier assets. That, in turn, will push stocks higher, making investors feel wealthier and more apt to boost spending. (Re: "trickle down", when investors increase spending, it reduces the slack in the economy and lowers unemployment.) Thus, QE is intended to divert investment to where it is needed and to lift the economy out of the doldrums.
That’s the theory, at least. In practice, it doesn’t work so well. Over a trillion dollars in reserves are still sitting on banks balance sheets from QE1. The anticipated credit expansion never got off the ground; the banks loan books are still shrinking. Bernanke fails to say why more-of-the-same will produce a different result. QE is also risky; in fact, it could make matters worse. Unconventional methods of pumping liquidity into the economy can undermine confidence in the dollar and trigger turmoil in the currency markets. Trading partners like Brazil and South Korea are already complaining that the Fed is flooding the markets with money pushing up their currencies and igniting inflation.
The threat of more cheap capital is causing widespread concern and talk of a currency war. If Bernanke goes ahead with his plan, more countries will implement capital controls and trade barriers. The Fed is clearing the way for a wave of protectionism. Quantitative easing, which is essentially an asset swap--reserves for securities--will not lower unemployment or revive the economy. Low bond yields won’t spark another credit expansion any more than low interest rates have increased home sales. The way to tackle flagging demand is with fiscal stimulus; food stamps, state aid, unemployment benefits, work programs etc. The focus should be on putting money in the hands of the people who will spend it immediately giving the economy the jolt that policymakers seek. QE doesn’t do that. It depends on asset inflation to generate more spending, which means that we’ve returned to the Fed’s preferred growth formula--bubblenomics.
Quantitative easing is also extremely costly for, what amounts to, modest gains. Consider this, from the Wall Street Journal:
"The…
The Recklessness of Quantitative Easing
by ilene - October 18th, 2010 4:48 pm
The Recklessness of Quantitative Easing
Excerpt from John Hussman’s Weekly Market Comment:
An additional fruit of careless, non-economic thinking on behalf of the Fed is the idea of announcing an increase in the Fed’s informal inflation target, in order to reduce expectations regarding real interest rates. The theory here – undoubtedly fished out of a Cracker Jack box – is that lower real interest rates will result in greater eagerness to spend cash balances. Unfortunately, this belief is simply not supported by historical evidence. If the Fed should know anything, it should know that reductions in nominal interest rates result in a lowering of monetary velocity, while reductions in real interest rates result in a lowering of the velocity of commodities (commonly known as "hoarding").
Look across history both in the U.S. and internationally, and what you’ll find is that suppressed real interest rates are not correlated with an acceleration of real economic activity, but rather with the hoarding of commodities. Importantly, when people hoard, they generally hoard items that aren’t subject to depreciation, technological improvement, or other forms of obsolescence. Look at the prices of the objects that are rising in price at present – gold, silver, oil – and you will see this dynamic in action. That said, investors should not extrapolate these advances indefinitely, because all of these commodity prices have moved up in anticipation of Fed action, and now rely on massive and sustained quantitative easing. They do not represent low risk investment opportunities at present, elevated prices.
Read the whole article here.
ZULAUF: PREPARE FOR A CORRECTION IN ALL MARKETS
by ilene - October 17th, 2010 5:38 pm
ZULAUF: PREPARE FOR A CORRECTION IN ALL MARKETS
Courtesy of The Pragmatic Capitalist
Felix Zulauf provided some excellent macro thoughts in a recent interview with King World news. Zulauf believes gold is in a secular bull market, but that the near-term move is overextended. More specifically, Zulauf says the downside in the dollar is overdone and he foresees a dollar rally into the year-end. This will cause a correction in most assets – equities, commodities and gold. He says the correction in gold as a buying opportunity, however.
As always, Zulauf’s thoughts are a must listen. You can see the full interview here:
Inflation Targeting Proposal an Exercise in Blazing Stupidity; Fed Fools Itself
by ilene - October 15th, 2010 3:36 pm
Inflation Targeting Proposal an Exercise in Blazing Stupidity; Fed Fools Itself
Courtesy of Mish
Wrong animal, damn!
Lower interest rates are not typically synonymous with rising inflation, but Bernanke foolishly thinks he can get that magic pair with the power of persuasion in conjunction with Quantitative Easing.
Please consider Fed Considers Raising Inflation Expectations to Boost Economy
Federal Reserve policy makers may want Americans to expect inflation to accelerate in the future so they spend more of their money now.
Central bankers, seeking ways to boost flagging growth after lowering interest rates almost to zero and buying $1.7 trillion of securities, are weighing strategies for raising inflation expectations as well as expanding the balance sheet by purchasing Treasuries, according to minutes of the Fed’s Sept. 21 meeting released yesterday.
Some Fed officials are concerned that expectations of lower inflation will become self-fulfilling, damping demand by increasing borrowing costs in real terms, the minutes said. By encouraging Americans to believe prices will start rising at a faster pace, the Fed would reduce inflation-adjusted interest rates and stimulate the economy. Chairman Ben S. Bernanke said in 2003 that Japan could beat deflation by using a “publicly announced, gradually rising price-level target.”
“The Fed is on the verge of actively targeting a higher inflation rate,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. U.S. stocks advanced, sending benchmark indexes to five-month highs, the dollar fell and gold declined for the first time in three days after the minutes were released.
Trying to raise inflation expectations is untested in the U.S. The policy may backfire if actual inflation drifts higher than the Fed would like, potentially eroding gains won in the early 1980s by former Fed Chairman Paul Volcker, who raised interest rates as high as 20 percent to subdue prices.
Jim O’Sullivan, global chief economist at MF Global Ltd. in New York, said in a Bloomberg Television interview that the biggest risk is “boosting long-term inflation expectations more than they lower real interest rates.”
The FOMC could adopt a combination of inflation targeting and price-level targeting to get inflation expectations up, said Mark Gertler, a New York University economist and research co-author with Bernanke.
The Fed could restate its commitment to keep inflation rising annually at around 1.7 percent to 2 percent. At the same time, the FOMC could announce some
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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