By Dr. Lacy Hunt, Hoisington Investment Mgt. Co.
The October employment situation was dramatically weaker than the headline 159k increase in the payroll employment measure. The broader household employment fell 330k. The only reason that the unemployment rate held steady is that 254k dropped out of the labor force. The civilian labor force participation rate fell to a new low of 64.5%, indicating that people do not believe that jobs are available, but this serves to hold the unemployment rate down. In addition, the employment-to-population ratio fell to 58.3%, the lowest level in nearly 30 years.
While not actually knowing what happened to the net job change in the non-surveyed small business sector, the Labor Department assumed that 61k jobs were created in that sector. This assumption is not supported by such important private surveys as those from the National Federation of Independent Business or by ADP. Just a month ago the Labor Department had to revise downward the job totals due to a serious overcount of their statistical artifact known as the Birth/Death Model.
The most distressing aspect of this report is that the US economy lost another 124K full-time jobs, thus bringing the five-month loss to 1.1 million in this most critical of all employment categories. In an even more significant sign, the level of full-time employment in October was at the same level that was reached originally in December 1999, almost 11 years ago (see attached chart). An economy cannot generate income growth by continuing to substitute part-time work for full-time employment. This loss of full-time jobs goes a long way to explain why real personal income less transfer payments has been unchanged since May.
The weakness in real income is probably lost in an environment in which the Fed is touting the gain in stock prices and consumer wealth resulting from the latest quantitative easing (QE), but QE has unintended negative consequences for real household income. Due to higher prices of energy and food commodities, QE may result in less funds for discretionary spending for consumers whose incomes are stagnant. Also, with five-year yields falling below 1%, rates on CDs and other types of short-term bank deposits will decline, also cutting into household income. At the end of the day these effects will be more powerful than any stock-price boost in consumer spending, which, as always, will be very small and slow to materialize.
To have a broad-based recovery, the manufacturing sector must participate. Contrary to the ISM survey, manufacturing jobs fell 7k, the third consecutive drop, resulting in a net loss over the past three months of 35k.
In summary, the latest economic developments indicate a slight worsening of underlying fundamental conditions.
Friday, November 5, 2010
By Dr. Lacy Hunt, Hoisington Investment Mgt. Co.
Hot Money Adds to the Problem
From CLSA’s Fear and Greed
The announcement of QE2 has come in as expected, namely an incremental approach. Still, the approach is sufficiently gung-ho to continue to give the benefit of the doubt to the risk trade. Investors should remain overweight Asia and emerging markets which will again prove to be the major beneficiaries of quanto easing. Macro investors should also remain long Asian currencies against the US dollar, with the Singapore dollar remaining GREED & fear’s favourite currency on a risk-adjusted basis.
GREED & fear’s view on QE2 remains that it will not precipitate releveraging of the American economy, just like the first version did not. But it will probably take some time for the equity market to work that out reflecting the natural bullish bias. Still when the releveraging hopes are dashed attention will then turn to QE3, which next time may include a formal inflation target and purchases of private sector debt.
Billyboy will likely carry on with his mad experiment until he precipitates the collapse of the US dollar paper standard. The Fed’s attempt to combat the perceived problem of deflation will end up creating a far bigger problem. That is the systemic risk posed by the anticipated ratcheting up of QE. This is why the view here remains that America will turn out to be a case of “Japan-heavy” not “Japan-lite”.
GREED & fear continues to be surprised that US financial markets are not more concerned about the continuing foreclosure mess. There is also the separate but related issue of faulty representations and warranties made by originators of non-agency mortgage loans in the mortgage-backed securitisation process. The issue is whether this is institution specific or system wide.
There is a small but not zero risk that this securitisation-boomerang problem could turn out to be systemic in nature in terms of the losses it could impose on prominent commercial banks and investment banks in terms of billions of dollars of mortgage exposure being put back to them.
Having A Supply Of Healthy Foods That Last Just Makes Sense (AD)
One way US consumption has been boosted at the margin in the recent past is the growing practice of “strategic default” where people stop paying mortgages but continue to live “rent free” on the increasingly correct view that the banks will take an increasingly long time to foreclose on them. Such a trend can only serve to delay further a housing recovery.
The US housing crisis is somewhat unique in the sense that it is a product of a home financing bubble rather than a house price bubble. This is why house prices can get ridiculously cheap in the US before there is a final bottom. The systemic risk posed by the socialisation of the mortgage market is growing not receding.
With some politicians already calling for a nationwide moratorium on mortgage foreclosures, it is surely only a matter of time that the same sort of people will be calling for mandatory mortgage debt relief. This is a good reason for investors to sell exposure to US mortgage paper and US financial stocks.
The fundamental reason why such a mess exists is clearly that the repeal of the 1933 Glass-Steagall Act occurred without a realisation that such deregulation only made sense in the area of financial services if there was a similar deregulation in terms of allowing bad banks to fail. The most likely end game of a foreclosure crisis that turns systemic is another wave of taxpayer funded bank bailouts.
The renewed rise in PIGS spreads has not been accompanied by renewed euro weakness. This market action presumably reflects the news that the German efforts to impose some discipline on Euroland’s fiscal targets gives the euro more credibility. Still given the way both the Germans and the ECB blinked when the Greek crisis came to a head, it would be dangerous not to assume a similar reaction the time a crisis hits.
The Indian central bank is about the only central bank in Asia fundamentally comfortable with tightening independently of the US. This reflects the longstanding domestic demand driven nature of its economy and the resulting almost total absence of the export-orientated mercantilist bias so deeply entrenched amongst East Asian central bankers.
After a good jump following a NFP report that showed a net increase of 150,000 jobs, the market has now given back most of the gains. Perhaps its because more people are no longer being counted!? What? Isn't the Fed pumping the market today?
(AP) — The Federal Reserve is about to take a huge risk in hopes of getting the economy steaming along again. Nobody is sure it will work, and it may actually do damage.
The Fed is expected to announced today that it will buy $500 billion to $1 trillion in government debt, and drive already low long-term interest rates even lower. The central bank would buy the debt in chunks of $100 billion a month, probably starting immediately.
Economists call it “quantitative easing.“ It gets the name ”QE2″ — like the ship — because this would be the second round. The Fed spent about $1.7 trillion from 2008 to earlier this year to take bonds off the hands of banks and stabilize them.
Here‘s how it’s supposed to work this time: The Fed buys Treasury bonds from banks, providing them cash to lend to customers. Buying so many bonds also lowers interest rates because demand for Treasurys leads to higher prices and lower yields. Interest rates are linked to yields. Lower rates encourage people to borrow money for a mortgage or another loan.
At the same time, lower interest rates make relatively safe investments like bonds and cash less appealing, so companies and investors take the cash and buy equipment or other investments, like stocks. The S&P 500 takes off and Americans celebrate with a shopping spree. Businesses see a rise in sales and begin hiring again, and a virtuous cycle of more spending and more hiring ensues.
“It’s a desperate act,” says Jeremy Grantham, co-founder of the investment firm GMO. Grantham says it’s a clear message from the Fed to the rest of the world: “The U.S. doesn’t care if the dollar weakens.”
Here is a look at the ways the Fed’s strategy could backfire:
As word trickled out over recent months that the Fed was planning a new round of bond purchases, the dollar sank. It hit a 15-year low to the Japanese yen Nov. 1. Why? In the simplest terms, a country that cuts interest rates makes its currency less attractive to the worlds’ investors. The interest rate is also the investors’ yield, the payout they receive. When that yield falls, the world’s banks move their money into countries with higher rates. They may exchange U.S. dollars for Australian dollars then invest the money in higher-paying Australian bonds.
“The Fed aims to push up the prices of stocks, bonds, real estate, and you name it,” says Bill O’Donnell, head of U.S. government bond strategy at the Royal Bank of Scotland. “Everything is going to go up but the dollar.”
A drop in the dollar can help companies like Ford that sell their products abroad. When the dollar weakens against the euro, for example, one euro buys more dollars than before. Foreign customers notice the price of the Explorer they’ve been eyeing is lower in their currency, yet Ford still pockets the same number of dollars for every sale.
The downside is that a weakened dollar pinches people in the U.S. because anything produced in other countries becomes more expensive, like oranges from Spain or toys from China.
“Look around you,” says Thomas Atteberry, a fund manager at First Pacific Advisors. “How many things can you find that were made in the U.S.A?”
Buying bundles of Treasurys knocks down interest rates, making borrowing cheap. But it also motivates investors to move out of safe investments into riskier ones in search of better returns. The stock market, for instance, rises in value and everyone with some of their savings in stocks feels wealthier. Ideally, it produces what what economists call a “wealth effect”: People who feel better off spend more.
The problem, according to some critics, is that cheap borrowing costs and buoyant markets make a fertile environment for bubbles, which eventually pop. “The effort to help the economy sets up another more dangerous bubble,” says Grantham, who warned of Japan’s surging real estate and stock markets in the 1980s, soaring Internet stocks in the 1990s and the housing market in the 2000s.
Stocks in developing countries are a likely candidate for the next bubble. Cash from Europe and the U.S. has plowed into emerging markets, such as Brazil and Chile, since the financial crisis, largely because these countries have less debt and faster economic growth than in the developed world.
Another concern: Hedge funds borrowing cheap money can magnify their bets, taking a loan at 2 percent to buy a security that’s rising 10 percent. They sell the security, pay off the bank and pocket the rest. That’s true whenever interest rates remain low. Falling rates allow speculators to borrow larger amounts. In the extreme, losses from hedge funds and other borrowers can put their banks at risk and leave governments to clean up the mess.
The game only works as long as the investment keeps climbing. When the bubble breaks, the fallout can devastate an economy.
“I think bubbles are the main villain in this piece,” Grantham says.
Cheap debt provided the fuel for the housing bubble, allowing home buyers to take out larger loans on the belief that somebody else would buy the house at a higher price. Fed chief Ben Bernanke’s answer, Grantham said, is to start the cycle over again by blowing a new bubble. “All they can do is replace one bubble with another one,” he said.
For others in the bond market, the greatest worry isn’t that the Fed will flood the economy with dollars and lets inflation run wild. It’s that the Fed will prove too timid.
“Whether QE2 works or not will be decided by the bond market,” says Christopher Rupkey, chief economist at Bank of Tokyo. “Without a big number that gets the market’s attention, the program they announce could be dead on arrival.”
News reports that the Fed may spend less than the $500 billion bond traders have been betting on has helped push long-term rates higher in the last three weeks. David Ader, head of government bond strategy at CRT Capital, sketches one scenario if the Fed shoots too small. Say the Fed announces a $250 billion plan. The yield on the 10-year Treasury note, which is used to set lending rates for mortgages and corporate loans, could jump from 2.6 percent to maybe 3.2 percent.
“If the Fed’s efforts fail we suddenly look like Japan,” Ader says. “Japan started off wimpishly, then did it again, and again and then they wound up losing a decade.”
"An independent Fed is what we had when I was in the government. Volcker was the head of it...Today the Fed is scared to death that the boys and girls and robots on Wall Street are going to have a hissy fit. And therefore these programs, one after another, are simply designed to somehow pacify the stock market, and hoping to keep the stock indexes going up, and that somehow that will fool the people into thinking they are wealthier and they will spend money. The people aren't buying that. Main Street is not stupid enough to believe that engineered rallies as a result of QE2 stimulus are making them wealthier and so they should go out and buy another Coach bag. This is really crazy stuff that I can't say enough negative about...The Fed is telling a lot of lies to the market... it is telling all the politicians on Capitol Hill you can issue unlimited debt cause it doesn't cost anything. We have $9 trillion of marketable debt. Upwards of 70% of that has maturities of 5 years or less down to 90 days. All of those maturities are 1% down to 10 basis points. So from the point of view of Congress, the cost of carrying the debt is essentially free. When you tell politicians they can issue $100 billion of debt a month for free, how do you expect them to do the right thing, and ask their constituents to sacrifice... I think the Fed is injecting high grade monetary heroin into the financial system of the world, and one of these days it is going to kill the patient." -- David Stockman,
Nov 4 (Reuters) - Unbridled printing of dollars is the biggest risk to the global economy, an adviser to the Chinese central bank said in comments published on Thursday, a day after the Federal Reserve unveiled a new round of monetary easing.
China must set up a firewall via currency policy and capital controls to cushion itself from external shocks, Xia Bin said in a commentary piece in the Financial News, a Chinese-language newspaper managed by the central bank.
"As long as the world exercises no restraint in issuing global currencies such as the dollar -- and this is not easy -- then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament," he said.
As an academic adviser on the central bank's monetary policy committee, Xia does not have decision-making power but does provide input to the policy-making process.
The Federal Reserve launched a fresh effort on Wednesday to support the struggling U.S. economy, committing to buy $600 billion in government bonds despite concerns the programme could do more harm than good.
Thursday, November 4, 2010
Also noteworthy: This may seem boring. If so, ignore it! On the weekly chart (left), note that the Bollinger Bands are beginning to WIDEN again (see the purple lower band). That is indicative of ACCELERATING momentum on the higher time frame! And note on the daily chart (right) that the BBand on the bottom is moving up FASTER! With BBands, people tend to look only at the band nearest prices/candles, but in actuality, the more important thing is to pay attention to the behavior of the band OPPOSITE where prices are. It's shape is even more meaningful.
The BBand pattern on the right chart (daily) is one that is called "parallels" because the bands tend to move "parallel" to each other over an extended period. It is the most profitable kind because it denotes a long, steady, but gradual trend. When prices move too far outside the band in a single session, they are like an overstretched rubber band that has a tendency to snap back in a corrective move before proceeding even higher. When prices move too far, too fast, they tend to form a different pattern, ironically called a "bubble". It has no relation to what we normally refer to as economic "bubbles". Bubble BBand patterns tend to burn out quickly and are profitable, but not nearly as much as parallels. A series of bubbles on a lower time frame often appear as parallels on a higher time frame.
Since BBands are based upon statistics (the purple bands represent 2 standard deviations), the further outside the bands prices go, the more likely we are to see a contraction because the market is overbought/oversold, at least temporarily, until the market can "catch up", take a breather, and the crowd mentality can absorb the new, more extreme prices. Behavioral economics! I refer to this as the "rubber band" effect. It would be interesting to add a 3 standard deviation Boll Band to see if today's activity reached that level. I hope that's not too verbose!
If this isn't too boring, and you are interested in some very detailed tech analysis reading, I translated a book from French 4 years ago on a methodology called "Dynamic Technical Analysis" (as opposed to "static" Tech Analysis used by most traders) by Philippe Cahen, the former VP of Tech Analysis at Credit Lyonnais. I could perhaps put the doc on a file sharing website where you could download it. It is VERY detailed -- about 200 pages to teach a single trading methodology. It is also translated from French, so the language is, at times, somewhat convoluted. I've only shared it with a handful of other people, and most of those found it to be too complex to use. Even I have made alterations in my own trading.
"Fitch Ratings has assigned a Negative Outlook for the entire U.S. Residential Mortgage Servicer ratings sector on increased concerns surrounding alleged procedural defects in the judicial foreclosure process. This industry-wide issue will cause all servicers to be under increased scrutiny from a wide range of state and federal regulators, state attorneys general, and GSEs. All servicers will be affected, even those fully in compliance with all foreclosure rules and regulations."
"That is the joke of this country. People sit there arguing about whether or not to extend a tax cut that will cost 3% of a year's salary while the Fed, with no electoral oversight, is simply taking 10% of your LIFETIME savings - AGAIN! They did it last year, they did it this year and now they promise to do it next year too. That's 30% folks!" -- Phil's Stock World
from Standard and Poors today:
As Standard & Poor's Ratings Services sees it, the problems in the U.S. housing market are far from over. Moreover, with a growing portfolio of unsold homes, a sluggish economy, stubbornly high unemployment, the prospect of rising foreclosures, and billions in legacy losses, it appears unlikely in our view that housing and mortgage markets will be able to operate normally without continuing and substantial government involvement. That will likely mean further taxpayer support for Freddie Mac and Fannie Mae, the government-sponsored enterprises (GSEs) that, along with the Federal Housing Administration, now buy more than 90% of all home loans compared to less than half before the crisis.
That support has so far come at a price, which we believe is likely to rise substantially. Standard & Poor's estimates that the ultimate taxpayer cost to resolve Fannie Mae and Freddie Mac could reach $280 billion, including the $148 billion already invested--money largely spent to make good on loans gone bad. (Both GSEs are already in receivership.) That $280 billion, however, could swell to $685 billion, by our estimate, with the establishment of a new entity to replace Fannie and Freddie that the government would initially capitalize. Although federal authorities have taken no concrete public steps toward sponsoring a GSE alternative, , Standard & Poor's believes that it's a useful exercise to consider how much such a recapitalization might cost taxpayers.
Thanks to Zero Hedge for pointing out this article from Business Weekly:
From Businessweekly, October 22, 2008
While markets across the world have been crashing, the Zimbabwe Stock Exchange has being seeing record gains as citizens turn to equities to protect their money from the country's hyperinflation.
The benchmark Industrial Index soared 257 percent on Tuesday up from a previous one day record of 241 percent on Monday with some companies seeing share prices increase by up to 3,500 percent.
But before Wall Street traders start packing their bags and heading south, they should bear in mind that these figures are just another representation of Zimbabwe's collapsing economy and are almost meaningless in real terms.
Zimbabwe, once a regional breadbasket, is staggering amid the world's worst inflation, a looming humanitarian emergency and worsening shortages of food, gasoline and most basic goods. Inflation is at 231 million percent, but some experts put it more at about 20 trillion percent.
"Why leave money in the bank?" asked Emmanuel Munyukwi, chief executive of the Zimbabwe Stock Exchange at a seminar on the doing business in Zimbabwe on Tuesday.
"People are forced to come on the stock market. They believe that after hard currency, the stock market is the only viable option where you can get a bit of a return," he said.
Zimbabwe's stock exchange, established in 1896, is one of Africa's oldest and the fourth largest. A securities commission has been established and it is hoping to follow in the footsteps of other countries like its neighbor South Africa and list as a company.
There are 19 stockbroking firms in Zimbabwe and 90 percent of investors come from institutions, asset managers or pension funds. About 8 percent of investors are individuals and only 2 percent are foreigners. This is in comparison to about a decade ago when foreigners made up about 30 percent of investors.
Munyukwi expressed his dismay at the "gross economic mismanagement" by the Zimbabwean government which has led to the collapse of the economy, however, the stock exchange was managing to survive despite the harsh environment.
He cited Zimbabwe's isolation from the international world _ and therefore protection from the financial turmoil _ as one of the reasons the market was performing well.
"We all know what has been happening to the world financial markets, yet the stock exchange in Zimbabwe is breaking all records. We are running short of superlatives to describe the performance of the market," he said.
With the unofficial exchange rate leaping from 30 million Zimbabwean dollars to US$1 on Friday to 100 million to the greenback Monday, showing a shortage of cash, people are trying to hedge against inflation by turning to equities.
from Zero Hedge:
Just like in mutual fund outflows, the initial claims prior upward revision is spot on as expected: prior week's 434K was revised to 437K, continuing the statistically improbable streak by the Ministry of Truth. Otherwise, the current number, which will also be revised higher next week, came at 457K, 15K worse than expectations of 442K. And continuing claims, which came at 4,378K, was, presto, a decline from the now revised number of 4,382K, which initially came at 4,356K. Net, net: this is the 15th in a row upward revision for initial claims, 14th for continuing: propaganda uberalles.
Wednesday, November 3, 2010
Given the high market expectations, the US Federal Reserve had no choice but to announce a second tranche of quantitative easing, nicknamed QE2. But the measure is an inevitably blunt instrument for the difficult task of restoring growth and generating jobs. The benefits accruing to America come with burdens for other countries, and both could soon be swamped by the unintended consequences of this unavoidably imperfect policy approach.
By signalling its intention to purchase another $600bn of longer-term Treasury securities by the end of June 2011, the Fed hopes its injections of cash will lower interest rates, bolster asset prices, increase wealth and encourage households and companies to spend and hire. Moreover, by noting the possibility of doing more if the data disappoint, it is also hoping that markets could price in the institution’s future asset purchases, turbo-charging the direct policy impact before those purchases have even been specified.
While willing to act, the Fed is acutely aware that the potential benefits come with the certainty of collateral damage, and the likelihood of adverse unintended consequences.
The Fed faces three problems, with its solo role being the first. Having warned in late August in Jackson Hole that “central bankers alone cannot solve the world’s economic problems”, Ben Bernanke, the Fed’s chairman, is now leading an institution that is virtually on its own among US policymakers in meaningfully trying to counter the sluggishness of the US economy and the stubbornly high unemployment.
Other government agencies are paralysed by real and perceived constraints, seemingly happy to retreat to the sidelines and let the Fed do all the heavy lifting. But liquidity injections and financial engineering are insufficient to deal with the challenges that the US faces. Without meaningful structural reforms, part of the Fed’s liquidity injection will leak right out of the US and result in yet another surge of capital flows to other countries.
The rest of the world does not need this extra liquidity, and this is where the second problem emerges. Several emerging economies, such as Brazil and China, are already close to overheating; and the eurozone and Japan can ill afford further appreciation in their currencies.
The unfortunate conclusion is that QE2 will be of limited success in sustaining high growth and job creation in the US, and will complicate life for many other countries. With domestic outcomes again falling short of policy expectations, it is just a matter of time until the Fed will be expected to do even more. And this means Wednesday’s QE2 announcement is unlikely to be the end of unusual Fed policy activism.
The Fed would be well advised to prepare for this possibility from now.
originally published on 10/26:
You go, dude!
(Reuters) - Representative John Boehner, expected to be named the next speaker of the House of Representatives, vowed on Wednesday to repeal health care reforms pushed into law by the Obama administration.
"I believe that the healthcare bill that was enacted by the current Congress will kill jobs in America, ruin the best healthcare system in the world, and bankrupt our country," Boehner, an Ohio Republican, told a news conference. "That means we have to do everything we can to try to repeal this bill and replace it with common sense reforms to bring down the cost of health care.
The price of sugar has jumped to a 30-year high as the Brazilian harvest has tailed off sharply, hardening expectations of a shortage.
Traders believe that prices could soar over the coming months as the market faces a supply shortfall driven by smaller-than-forecast crops in important growing countries from Brazil to Russia and western Europe.
At the same time, inventories are at their lowest levels in decades. “All buyers we see are buying on a hand-to-mouth basis,” said Peter de Klerk of Czarnikow, the London sugar merchant.
That has pushed prices up sharply, with raw sugar futures in New York soaring 135 per cent from a low of 13 cents in May.
On Tuesday ICE March sugar rose 4 per cent to a peak of 30.64 cents a pound, surpassing the level reached in February and rising to their highest point since 1980, when prices jumped to nearly 45 cents.
The dramatic rise in sugar prices is causing headaches for policymakers. While sugar is widely available in the west and its price is rarely considered, it is an essential source of cheap calories in emerging economies, where surging sugar prices are driving food inflation.
On Tuesday India’s central bank raised benchmark interest rates for the sixth time this year in an attempt to curb inflation.
New Delhi has emerged as a crucial factor in the sugar market, as India’s harvest is expected to be large, but the government is still debating how much sugar to allow the country’s industry to export. Traders expect India to authorise exports of 1m-2m tonnes starting in December. Anything less, or even a delay to the decision, could send prices spiralling higher, traders warn.
“They need to start selling additional volumes by mid-December, otherwise the hole in the market is getting wider,” said Mr de Klerk.
The latest move up in prices was triggered by a spell of dry weather in Brazil, which dominates the global sugar trade with about half of world exports.
Unica, the country’s cane industry association, said last week that production was down 30 per cent in the first half of October from 2009, while Kingsman, a consultancy in Lausanne, has downgraded its forecast for the Brazilian crop by 2.3 per cent. “If Brazil is going to have a lower harvest it makes it that much harder to fill the deficit,” said Jonathan Kingsman.
Many observers believe Brazil’s sugar harvest will be smaller next year, as farmers are forced to replant ageing cane.
“For the sugar market, fear about Brazil is worse than fear about India, which drove the price to 30 cents last year,” Jean-Luc Bohbot, head of trading at Sucres et Denrées, one of the largest physical sugar traders, said last week.
“Anything affecting Brazil will have a direct impact on trade flows.”
Tuesday, November 2, 2010
by Ambrose-Evans-Pritchard at the UK Telegraph:
Pious words from G20 summit of finance ministers last month calling for the world to "refrain" from pursuing trade advantage through devaluation seem most honoured in the breach.
Taiwan intervened on Monday to cap the rise of its currency, while Korea's central bank chief said his country is eyeing capital controls as part of its "toolkit" to stem the flood of Fed-created money leaking out of the US and sloshing into Asia. Brazil has just imposed a 2pc tax on inflows into both bonds and equities – understandably, since the real has risen by 35pc against the dollar this year and the country has a current account deficit.
"It is becoming harder to mop up the liquidity flowing into these countries," said Neil Mellor, of the Bank of New York Mellon. "We fully expect more central banks to impose capital controls over the next couple of months. That is the world we live in," he said. Globalisation is unravelling before our eyes.
Each case is different. For the 40-odd countries pegged to the dollar or closely linked by a "dirty float", the Fed's lax policy is causing havoc. They are importing a monetary policy that is far too loose for the needs of fast-growing economies. What was intended to be an anchor of stability has become a danger.
Hong Kong's dollar peg, dating back to the 1960s, makes it almost impossible to check a wild credit boom. House prices have risen 50pc since January 2009, despite draconian curbs on mortgages. Barclays Capital said Hong Kong may switch to a yuan peg within two years.
Mr Bloom said these countries are under mounting pressure to break free from the dollar. "They are all asking themselves whether these pegs are a relic of the past," he said.
China faces a variant of the problem with its mixed currency basket, a sort of "crawling peg". Commerce minister Chen Deming said last week that US dollar issuance is "out of control". It is causing a surge of imported inflation in China.
Critics in the US Congress say China could solve that particular problem very quickly by letting the yuan rise enough to bring the country's $180bn trade surplus into balance.
They say the strategy of holding down the yuan to underpin China's export-led model is the real source of galloping wage and price inflation on China's eastern seaboard. The central bank has accumulated $2.5 trillion of foreign bonds but lacks the sophisticated instruments to "sterilise" these purchases and stem inflationary "blow-back".
But whatever the rights and wrongs of the argument, the reality is that a chorus of Chinese officials and advisers is demanding that China switch reserves into gold or forms of oil. As this anti-dollar revolt gathers momentum worldwide, the US risks losing its "exorbitant privilege" of currency hegemony – to use the term of Charles de Gaulle.
The innocent bystanders caught in the crossfire of Fed policy are poor countries such as India, where primary goods make up 60pc of the price index and food inflation is now running at 14pc. It is hard to gauge the impact of a falling dollar on commodities, but the pattern in mid-2008 was that it led to oil, metal, and grain price rises with multiple leverage. The core victims were the poorest food-importing countries in Africa and South Asia. Tell them that QE2 brings good news.
So the question that Ben Bernanke and his colleagues should ask themselves is whether they have thought through the global ramifications of their actions, and how the strategic consequences might rebound against America itself.
Monday, November 1, 2010
The new target weights for the commodity components are listed below.
Natural Gas 11.2189620%
Crude Oil 14.7092970%
Unleaded Gasoline 3.4966710%
Heating Oil 3.5750700%
Live Cattle 3.3591330%
Lean Hogs 2.0000000%
Soybean Oil 2.9372440%
The target weights are determined in accordance with construction rules described in the Dow Jones-UBS Commodity Index Handbook, which is available for download at http://www.djindexes.com/.
from Economic Policy Journal:
Just days after the Federal Reserve will announce it has launched QE2, the Fed will hold a major conference at Jekyll Island.
The island is off the coast of the U.S. state of Georgia.
In November 1910, Senator Nelson W. Aldrich and Assistant Secretary of the Treasury Department A.P. Andrews, and other top financiers,arrived at the Jekyll Island Club to discuss monetary policy and the banking system. The secret meetings led to the creation of the Federal Reserve.
Forbes magazine founder Bertie Charles Forbes wrote several years later:
Picture a party of the nation's greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundred of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written... The utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done. Senator Aldrich notified each one to go quietly into a private car of which the railroad had received orders to draw up on an unfrequented platform. Off the party set. New York's ubiquitous reporters had been foiled... Nelson (Aldrich) had confided to Henry, Frank, Paul and Piatt that he was to keep them locked up at Jekyll Island, out of the rest of the world, until they had evolved and compiled a scientific currency system for the United States, the real birth of the present Federal Reserve System, the plan done on Jekyll Island in the conference with Paul, Frank and Henry... Warburg is the link that binds the Aldrich system and the present system together. He more than any one man has made the system possible as a working reality.On November 6 of this year, Federal Reserve Chairman Ben Bernanke will speak on 'Federal Reserve: Past and Present' before the 'A Return to Jekyll Island: The Origins, History, and Future of the Federal Reserve' conference hosted by the Federal Reserve Bank of Atlanta at the Jekll Island Club Hotel.
The conference opens a day earlier on Friday, November 5, when Federal Reserve Bank of Atlanta President Dennis Lockhart gives welcome remarks.
Also at the conference:
Federal Reserve Bank of Philadelphia President Charles Plosser will moderate a discussion of a paper, 'To Establish a More Effective Supervision of Banking: How the Birth of the Fed Altered Bank Supervision'Needless to say, nothing good can come out of a conference of Fed members talking to each other after just launching QE2 and who will be "inspired" by the historic Jekyll Island location.
Federal Reserve Bank of Cleveland President Sandra Pianalto will moderate a discussion of a paper, 'The Promise and Performance of the Federal Reserve as Lender of Last Resort 1914-1933'.
Federal Reserve Bank of Dallas President Richard Fisher will moderate a discussion of a paper, 'Where It All Began: International Trade, the Market for Acceptances, and the Making of Lending of Last Resort in Britain'
Federal Reserve Bank of St. Louis President James Bullard will moderate a discussion of a paper, 'From Passing Legislation to Building an Institution: Perspectives on the Early Years of the Federal Reserve System'
Federal Reserve Bank of St. Louis President James Bullard will moderate a discussion of a paper, 'The Fed from the Treasury-Fed Accord (1951) until the End of Monetary Targeting (1982)'.
Federal Reserve Bank of Richmond President Jeffrey Lacker will moderate a discussion of a paper, 'The Recent Financial Turmoil: New Directions for Monetary Policy Analysis'.
Federal Reserve Bank of Chicago President Charles Evans will moderate a panel on 'The Role of Research in Monetary Policy Deliberations'.
Federal Reserve Bank of Minneapolis President Narayana Kocherlakota will speak on 'Policy and Asset Bubbles'.
Given the current Fed chairman loves new "tools" by which to inflate the currency and that the conference will be about discussing new tools and old, these guys will be re-enforcing each others mad thinking that they can micro-manage the economy without creating dangerously high inflation and that they are not directly responsible for the recent boom-bust cycle.
Also known as "too-big-to-fail banks"! Thanks to the Economic Policy Journal for this list! I might also point out that only 7 of the 18 primary dealers are American companies. I think this is significant because in a pinch (think war), some of them might not be particularly loyal to the best interests of Americans. Come to think of it, they might not be loyal to American interests NOW!
from Economic Policy Journal:
These are the ultimate insiders. They are cleared to trade directly with the Federal Reserve Bank of NY. I am told that the Fed shoveled money to at least some of the Primary Dealers, after the peak in the financial crisis, by buying and selling with the PD's at huge spreads which allowed the PD's to book huge $$$$.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies & Company, Inc.
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Mizuho Securities USA Inc.
Morgan Stanley & Co. Incorporated
Nomura Securities International, Inc.
RBC Capital Markets Corporation
RBS Securities Inc.
UBS Securities LLC
THE CHANGE: Effective November 1, 2010, Banc of America Securities LLC merged with Merrill Lynch, Pierce, Fenner & Smith Incorporated, with the latter the surviving entity. The primary dealer is now Merrill Lynch, Pierce, Fenner & Smith Incorporated.
September savings rate dipped to 5.3%, the lowest reading in 2010, and a decline from August's downward revised 5.6%. This is due to a miss in both personal income and personal spending, the former coming at -0.1% vs Exp. of 0.2 (and a prior revised to 0.4%) with the latter at 0.2% versus expectations of 0.4% (and an upward revised prior to 0.5%). The savings rate has now declined in a straight line since peaking at 6% (2010 high), to the current low. In other words Americans have been spending more than they were making for four months in a row. And on wonders why consumer discretionary names have been doing well...
from Zero Hedge:
Major beat by the Chicago Manufacturing ISM, coming at 56.9, on expectations of 54, compared to 54.4 previous, and the highest since May 2010. Yet not all is rosy, as the majority of respondents still find conditions deteriorating: "The dollar is weakening again, which is resulting in higher costs for our materials we purchase overseas. It is hurting our profit margins"; "Currency continues to wreak havoc with commodity pricing"; "Customers remain cautious, placing orders at the last minute, making supply planning a challenge."