Friday, April 15, 2011
The Empire Manufacturing Index was the best in months, and is fueling stocks, but also has sent gold and silver to new all-time highs, with crude oil plunging ahead also.
Thursday, April 14, 2011
This provides preliminary indication that FX markets have come to focus on debt and creditworthiness in addition to the standard macro variables. It suggests both potential upside for the EUR and other currencies that get their sovereign debt situation under control and significant downside for USD and JPY if markets ever begin to price in concrete risk that debt will become unsustainable.
I've always loved the first verse of this poem. I don't even remember where I first heard it.
We are the Music Makers
WE are the music-makers,
And we are the dreamers of dreams,
Wandering by lone sea-breakers,
And sitting by desolate streams;
World-losers and world-forsakers,
On whom the pale moon gleams:
Yet we are the movers and shakers
Of the world for ever, it seems.
I need to keep an eye out for the emergence of these signs. I dread the Fed initiating more quantitative easing, but I think they will. One thing that stood out in this commentary was the time frame he expects -- Q4 2011.
from Business Insider:
A hard landing is likely coming and it will force the Fed to initiate quantities easing 3, according to Nomura's Bob Janjuah (via Zero Hedge).
Janjuah still believes there is a chance that the emerging world experiences a soft landing, but has now decided the chances of that scenario are moving way lower. QE3 wouldn't come until Q4 2011 or early 2012, but it would have strong negative results.
From Janjuah (via Zero Hedge):
This seems like a reasonable assessment to me.
John Paulson made three important points when he spoke to Les Echos, a French publication, recently.
1. Financial reform could hinder the recovery. It is text-heavy (2,000 pages!) and thought to be very difficult to implement. It was precipitated by an emotional reaction. The result is that it creates numerous conflicts and uncertainties. As Alan Greenspan says, I think it will create market distortions.
2. Inflation is a risk. Quantitative recovery is not without consequences and creates the potential for inflation. Currently we have no inflation because we still have overcapacity. But the risk exists. It is undeniable that this monetary expansion is equivalent to running the printing press. It remains to be seen whether the Fed will reduce the recovery before it becomes inflationary.
3. U.S. debt levels will sooner or later reach a "very serious" problematic threshold. There are serious uncertainties about the exit strategy of the Fed. I'd be very surprised if there was a third round of QE. While many economists believe that the U.S. debt remains at a manageable level, sooner or later it will reach a threshold that will be a problem. Today, our federal debt is still at a relatively reasonable (around 65% of GDP), but if we add the local debt of the States and local governments are approaching the level of 100% of GDP which begins to be close to that of Greece or Portugal. It is a very serious potential problem. The U.S. does not have the ability of unlimited borrowings.
from Business Insider:
Even the baseline scenario in places like Las Vegas and Miami is grim, where Case Shiller projects a 21% decline in home prices from 2010 to 2012.
But in one scenario it could be worse.
6.7 million delinquent mortgages are waiting to flood the market around the country -- and with near-zero cure rates most of them will. Another 2 million homes in foreclosure are being held off the market by banks.
Economist Keith Jurow says distressed asset investors are ignoring this threat: "If you are an investor thinking of buying one or more properties in Miami-Dade County, for example, you need to know that 24.9% of all active first liens there were seriously distressed. This means that more than 91,000 properties are almost certainly going to be dumped onto the market. Will that exert downward pressure on prices? Absolutely."
Distressed mortgages represented over ten percent of all mortgages in ten large markets, as of Q3 2010.
From Jerusalem Post:
BEIRUT - Libyan government forces struck the coastal city of Misrata with dozens of Grad rockets on Thursday, killing eight people, a rebel spokesman said.
Misrata, Libya's third-biggest city, is the only major rebel stronghold in the west of the country. It has been the scene of major fighting between rebels and Gaddafi's forces for several weeks.
Thinking beyond the Fortune 500 for womenClaudia Goldin tells WSJ's Alan Murray that women are making their way to the top at many Ivy League schools. Plus: Saadi Zahidi of the World Economic Forum discusses how women in foreign countries are contributing to their nations' economies.
Wednesday, April 13, 2011
In this chart, prices chopped higher on thin volume in a melt-up overnight, but sold off at the market open. While the buying is thin, the selling is occurring on heavy volume, which is suggestive of fund selling of all kinds (hedge, pension, mutual funds, etc.). The volume has shifted from bullish to bearish, at least temporarily. The same thing has occurred several times in the past few weeks.
There appears to be a change in the wind, and I suspect that it is because the market is anticipating the end of the Fed's quantitative easing program in June. The nearly infinite liquidity that the Fed has provided will soon come to an end -- for the time being. Of course, anything could change by summer. I'll be anxiously awaiting the Fed's policy statement following its meeting at the end of April.
Tuesday, April 12, 2011
Monday, April 11, 2011
“Suppose that in a mere three years your family’s spending – spending, mind you, not income – jumps from $80,000 to $101,600. You’re now understandably worried about the debt you’re piling up as a result of this 27 percent hike in spending.“So mom and dad, with much drama and angst and finger-pointing about each other’s irresponsibility and insensitivity, stage marathon sessions of dinner-table talks to solve the problem. They finally agree to reduce the family’s annual spending from $101,600 to $100,584.“For this 1 percent cut in their spending, mom and dad congratulate each other. And to emphasize that this spending cut shows that they are responsible stewards of the family’s assets, they approvingly quote Sen. Harry Reid, who was party to similar negotiations that concluded last night on Capitol Hill – negotiations in which Congress agreed to cut 1 percent from a budget that rose 27 percent in just the past three years. Said Sen. Reid: ‘Both sides have had to make tough choices. But tough choices is what this job’s all about.’“What a joke.”Source: Don Boudreaux, Cafe Hayek, April 9, 2011.
- Young populations with high unemployment rates and a skewed distribution of income are a volatile combination for the people in power.
- To placate these groups, oil-producing countries are increasing public expenditures.
- Governments are also to extend energy subsidies to shelter the country’s consumers from rising energy prices.
Sunday, April 10, 2011
This week's Stock World Weekly is called "Balancing Act." Here's the Week Ahead section, click here for the full newsletter. - Ilene
Excerpt (Week Ahead Section):
The S&P 500 failed to hold the critical level of 1,333 on Friday and this market is feeling a bit toppy. If the Fed allows QE2 to end in June as planned, the perpetual market prop-up may face some headwinds.
On Saturday, April 9, Phil posted “Investing for Income - Part One.” The article discusses constructing a conservative, low-maintenance portfolio designed to produce consistent income while preserving capital. Our intention is to test- drive a virtual portfolio of $500,000 and see how it performs over time, with the goal of generating $4,000/month income. Of course, part of the challenge is not only to produce income, but also to offset inflationary effects and prevent the erosion of the value of the original investment. Part two will follow in about two weeks.
Inflation and stagflation have been important topics of debate, particularly since the Fed announced the QE2 program last fall, and even more so as prices of commodities have been rising unabated. While Fed apologists make academic arguments that QE shouldn’t cause inflation, many financial commentators disagree. Jason Kaspar, of GoldShark.com, discussed the subject with SWW editor Ilene in email correspondence. Jason wrote, “The real definition of inflation is an increase in the money supply, and according to me, that includes credit as well. The real definition of deflation, conversely, is a decrease in the money supply.
“Logic presupposes that when the money supply increases, the prices of goods will increase. This is generally true. However, the reverse is not always true. An increase in the price of goods does not necessarily mean there has been an increase in the money supply.
“For example, during the collapse of 2008, a tremendous amount of money was vaporized through de-leveraging (among other things). We saw much of this occur in the mortgage market with innumerable foreclosures. When the Treasury instituted its stimulus spending and the Fed helped facilitate this spending through quantitative easing in 2009, the stimulus served only to replace the money that was lost. The Fed bought mortgage backed securities (in QE1) and treasuries from the banks, but instead of lending that money out to individuals, the banks allowed it to build in reserves at the Fed (which renders it useless) or have been investing that money in assets, like food, equities, gold, etc.
“Therefore, even though there is no overall increase in the money supply (M3 has started contracting again recently), some of the QE money has been shifted into specific assets, which are enjoying nominally large price increases. This is the difference between money supply inflation, and price inflation.”
Russ Winter, at Wall Street Examiner, and author of Winter Watch writes, “The following chart says it all (below). The Fed’s aggressive Treasury monetization has been the causa proxima (90-percent correlation) to the pedal-to- the-metal Minsky Meltup in commodities. I suspected this would be the effect but confess I did not believe the Fed and government could be so irrational and stupid as to attempt it, especially with the blowback evident by year end. Though I am one of the most persistent critics of Fed rabble, this exceeded even my worst fears and nightmares. This is what Bernanke refers to as ‘temporary’ inflation. Nor did I anticipate the markets ignoring such clear and present danger either. The transmission of this inflation disease appears to take about six months, which corresponds to the MIT price survey I have been using. It, too, now shows that inflation is in full swing.”
“If the Fed continues its purchases, we can calculate that each new $100 billion of Treasury purchased will add about 5 percent to the commodity index and $7 to oil. It takes four weeks for the Fed to purchase $100 billion in Treasuries. What a game of chicken being played out and right before our eyes! You can sense the collision, flying glass, blood and bones at almost any moment. If the Fed desists or scales down its Treasury buying, the stark trillion dollar question becomes who will buy them?” (The Game Of Chicken: Collision, Blood and Bones, originally posted on the Winter Economic and Market Watch blog, and Russ’s premium service, Russ Winter’s Actionable.)
Lee Adler, editor and publisher of Wall Street Examiner presents another perspective: “The evidence shows that banks are again out of the Treasury buying game. It also shows that they lost money in the first quarter, which is insane considering that their cost of funds is zero. It’s an indication of just how dire the circumstances are. Banks continue to accumulate cash at a frantic rate in their accounts at the Fed. The last time reserves rose this fast was in the midst of the crisis in 2008.
“Although the banks did buy some Treasuries in mid March, they have again stopped buying and reduced their holdings, opting to hold cash at the Fed instead. The banks are pulling cash out of the system and depositing it in their reserve accounts even faster than the Fed is printing it, lately 60% faster. We have to wonder what has them so spooked.
“At the same time, FCBs [foreign central banks] purchases of Treasuries are also backsliding, and are well below the threshold where they need to be to keep the markets stable. These elements essentially neutralize the Fed’s pumping. It may not be enough to send the
markets lower, and in the absence of new Treasury supply, Fed buying should be enough to keep the field tilted in favor of higher prices. April’s bias should be to the upside, but the background drag will be there. Things will get tougher in May when Treasury supply increases, and really tough this summer when the Fed presumably will stop pumping.” (Fed Gets To Skate On Thin Ice In April)
The S&P 500 is near the level where we might be more bullish on a technical basis. However, the low volumes that have characterized this rally, and the artificiality of it, leave us skeptical and cautious going into next week.
Read more: Balancing Act.
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