Friday, April 15, 2011
No Stopping ANYTHING Today!
No stopping gold, crude oil ($110), or stocks today! This is going to end in tears!
Gold - closes in on $1500 (silver closing in on $43)
Crude oil -- back above $110
Stocks
Gold, Silver, Crude Oil Power Higher
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.
Gold
Crude
Stock Futures Spike on CPI As-Expected
Thursday, April 14, 2011
Citi Assessment of Impact of Debt Limit Impasse
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.
"We are the Music Makers"
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.
Arthur O'Shaughnessy
Buy the Dip! Gold, Silver Completely Recover!
Not a Pretty Picture! Housing is Still in a Bubble -- and Going to Get Worse!
And Gary Shilling says home prices will decline another 20%!
Bob Janjuah Comments on the Danger and Consequences of QE3
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):
We feel that QE3 would risk a very negative outcome whereby US Treasuries start being priced as a risky credit asset (with real yields rising sharply) and where the US dollar would no longer be viewed as any sort of useful store of value.
And the result of such a scenario:Assuming that the QE3 option is eventually exercised (as we do under the hard landing outcome) and assuming it does what we fear to the credibility and status of the US, the US dollar and US Treasuries, then we think the result, most likely at some point between 2012 and 2014, will be major fx regime changes and significant paradigm shifts in global fx markets. As these changes and shifts occur, gold could perform very well, as could other scarce physical assets (possibly super prime real estate). And the highest quality (by BS strength) nominal corporate assets – top quality equities in other words – may at least on a relative basis (if not absolute) perform fairly well.
So if we do see QE3 in response to a global economic weakening, gold and prime real estate are the winners, according to Janjuah.
John Paulson on Risks to Our Economy
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.
Housing Hullabaloo
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.
Stocks Show Signs of Life Despite Bad News
But Then Crude Oil Spikes
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.
Silver Surge
Double Whammy - Jobless Claims Rise, PPI Rises to Eye-Brow-Raising Levels
David Stockman: Fed's Monetary Path of Destruction
This is part two of a two-part series. I value Stockman's opinion particularly because he is a partner in a Private Equity firm. They know what makes business and free enterprise tick better than any other group of people in the world.
GREENWICH, Conn. (MarketWatch) — The destructive result of the Federal Reserve’s earlier housing and consumer credit bubble became the excuse for embracing a destructive zero interest rate policy which is self-evidently fueling even more destruction.
This destruction is namely, the exploitation of middle class savers; the current severe food and energy squeeze on lower income households; the illusion in Washington that Uncle Sam can comfortably manage $14 trillion in debt because the interest carry is close enough to zero for government purposes; and the next round of bursting bubbles building up among the risk asset classes.
Moreover, the Fed soldiers on with its serial bubble-making, even though it is evident that the hallowed doctrines of modern monetary theory and the inherently dubious math of Taylor rules have failed completely.
Indeed, the evidence that the Fed no longer has any clue about the transmission pathways which connect the base money it is emitting with reckless abandon (e.g. Federal Reserve credit) to the millions of everyday pricing, hiring, investing and financing outcomes on Main Street sits right on its own balance sheet. Specifically, if the Fed actually knew how to thread the needle to the real economy with printing press money it wouldn’t have needed to manufacture $1 trillion in excess bank reserves — indolent entries on its own books for which it is now paying interest.
So in the present circumstances, ZIRP and QE2 amount to a monetary Hail Mary. There is no monetary tradition whatsoever that says the way back to U.S. economic health and sustainable growth is through herding Grandma into junk bonds and speculators into the Russell 2000 (NASDAQ:RUT) .
Admittedly, the junk-bond financed dividends being currently extracted by the LBO kings from their debt-freighted portfolios may enable them to hire some additional household help and perhaps spur some new jobs at posh restaurants, too. Likewise, the 10% of the population which owns 80% of the financial assets may use their stock market winnings to stimulate some additional hiring at tony shopping malls.
That chairman Bernanke himself has explained in so many words this miracle of speculative GDP levitation, however, does not make it so. The fact is, if transitory wealth effects add to current consumer spending, they can just as readily subtract on the occasion of the next “risk-off” stampede to the downside. Indeed, the proof — if any is needed — that cheap money fueled asset inflations do not bring sustainable prosperity lies in the still smoldering ruins of the U.S. housing boom.
In truth, the Fed’s current money printing spree has no analytical foundation, and amounts to seat-of-the-pants pursuit of a will-o’-wisp — the idea of a perpetual bull market. Like the Bank of Japan, the Fed has made itself hostage to the global speculative classes, and must repeatedly inject new forms of stimulus to keep the bubbles rising.
This is the only possible explanation for its preposterous decision to allow the big banks to resume dissipating their meager capital accounts by paying “normalized” dividends and by resuming large-scale stock buybacks. These are the same financial institutions that allegedly nearly brought the global economy to its knees in September 2008, according to the Fed chairman’s own words.
In what is no longer secret testimony to the FCIC (Financial Crisis Inquiry Commission), Federal Reserve Chairman Bernanke claimed that the Wall Street meltdown “was the worst financial crisis in global history” and that “out of maybe 13…..of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two”.
That testimony was recorded just 15 months ago, but the financially seismic events it references have apparently already faded into the dustbin of history. Still, even if the dubious proposition that the banking system has fully healed were true, what did the Fed hope to accomplish besides goosing the S&P 500 (CME:INDEX:SPX) via speculative rotation into the bank indices?
Well, there are no other plausible explanations. Certainly the stated theory — namely, that by green lighting disgorgements of capital today the Fed’s action will facilitate bank capital raising and new lending in the future —merits a loud guffaw. The fast money has already priced in whatever dividend increases and share buybacks may occur before the next banking crisis, but the last thing these speculators expects is a new round of dilutive capital issuance by the banks. Stated differently, the bid for bank stocks unleashed by the Fed’s relief action is predicated on speculators’ pocketing any near-term “surplus” capital, not leaving it in harms way.
Moreover, even if the Fed’s action had the effect of bolstering, not depleting, bank capital the larger issue is why does our already massively bloated banking system need more capital in any event? The reflexive answer is that this will help restart the flow of credit to Main Street, but it doesn’t take much digging to see that this is a complete non-starter.
The household sector is still saddled with massive excess debt — unless you believe that the credit bubble of recent years is the sustainable norm. The fact is, prior to the Fed’s easy money induced national LBO, debt-to-income ratios at today’s levels were unthinkable. In 1975, for example, total household debt—including mortgages, credit cards, auto loans and bingo wagers—was about $730 billion or 45% of GDP
During the 1980’s, however, this long-standing household leverage ratio began a parabolic climb, and never looked back. By the bubble peak in Q4 2007, total household debt had reached $13.8 trillion and was 96% of GDP. Yet after 36 months of the Great Recession wring-out, the dial has hardly moved: household debt outstanding in Q4 2010 was still $13.4 trillion, meaning that it has shrunk by the grand sum or 3% (entirely due to defaults) and still remains at 90% of GDP or double the leverage ratio that existed prior to the debt binge of the past three decades.
So the banking system does not need more capital in order to increase credit extensions to the household sector. In fact, the two principal categories of household debt — mortgage loans and revolving credit, continue to decline as American families slowly shed unsupportable debt. The only reason total household debt appears to be stabilizing in recent quarters is that student loan volumes are soaring, but this growth is being funded entirely by the Bank of Uncle Sam now that private bank loan guarantees have been eliminated.
Indeed, the startling fact is that the approximate $1 trillion of student loans outstanding — sub-prime credits by definition — now exceed the $830 billion of total credit card debt by a wide margin. While this latest student loan bubble will end no better than the earlier credit bubbles, the larger fact remains that the household sector is only in the early stages of deleveraging. Not the least of the self-evident motivating forces here is that the leading edge of the household sector — the 78 million strong baby boom generation — appears to be figuring out that it is not 1975 anymore, and that retirement and old age are approaching at a gallop.
This obvious household deleveraging trend remains a mystery to the Fed and to the Wall Street stock peddlers who occasionally moonlight as economists. One recent air ball offered up by the latter is that the ratio of debt to disposable personal income (DPI) has dropped materially, and that this proves the household sector has been healed financially and is ready to borrow again. Specifically, the household debt-to-DPI ratio has fallen to 116% from a peak of 130% in late 2007.
Never mind that this measure of household financial health stood at just 62% back during the healthier climes of 1975. It is evident that even the modest improvement in this ratio during the last three years is a statistical illusion. It turns out that the debt-to-DPI ratio is improving mainly because the denominator has gained about $885 billion or 8.3% since the end of 2007.
Yet this gain in DPI has nothing whatsoever to do with an improved debt carrying capacity in the household sector. Thanks to the more or less continuous riot of Keynesian stimulus in Washington since early 2008, we have had a tax holiday and a transfer payment bonanza. Specifically, in the three years since the fourth quarter 2007 peak, personal taxes are down at a $312 billion annual rate (which adds to DPI, an after-tax measure) and transfer payments are up by a $572 billion annual rate.
Both of these are components of DPI, and taken together ($884 billion) they account, quite astoundingly, for 99.8% of the DPI gain since Q4 2007. Moreover, it does not take a lot of figuring to see that these trends won’t last. The Federal tax take is now less than 15% of GDP — the lowest level since 1950 — and will be rising year-after-year in the decade ahead, as will personal tax burdens at the state and local level.
At the same time, the 30% surge in transfer payments over the last three years is mostly done. Unemployment insurance payments — which accounted for much of the rise — will be flat or shrinking in the near future, and various one-time low income programs have already expired. Moreover, the bulk of the current $2.3 trillion in transfer payments go to elderly and poverty level households which carry negligible portions of the $13.4 trillion in household debt, in any event.
By contrast, the ratio of household debt to private wage and salary income — a far better measure of debt carrying capacity — has not improved at all. Household debt amounted to 255% of private wage and salary income at the peak of the credit boom in late 2007, and was still 251% in Q4 2010. At the end of the day, the household debt-to-DPI ratio improved solely because Uncle Sam went on a borrowing spree and temporarily juiced DPI with tax abatements and transfer handouts.
In short, banks don’t need more capital to support household credit because the latter is still shrinking, and will be for a long time to come. Moreover, it might as well be said in this same vein that the business sector doesn’t need no more stinking debt, neither!
At the end of 2005 — before the credit bubble reached its apogee — the non-financial business sector (both corporate and non-corporate entities) had total credit market debt of $8.3 trillion, according to the Fed’s flow of funds data. By the end of 2007, this total had soared by 25% to $10.4 trillion. But contrary to endless data fiddling by Wall Street economists, the business sector as a whole has not deleveraged one bit since the financial crisis. As of year-end 2010, business debt was up a further $500 billion to $10.9 trillion.
The whole propaganda campaign about the business sector becoming financially flush rests on an entirely spurious factoid with respect to balance sheet cash. Yes, that number is up a tad — from $2.56 trillion in fourth quarter 2007 to $2.86 trillion at the end of 2010. Still, this endlessly trumpeted gain in cash balances of $300 billion is more than offset by the far larger gain in business sector debt — meaning that, on balance, the alleged cash nest egg held by American business is simply borrowed money.
At the end of the day, $10.9 trillion is a lot of debt in absolute terms, but based on the Fed’s data on the market value of business sector assets, it is also crystal clear that the relative burden of business debt has been rising, not falling. At the bubble peak in late 2007, business sector assets were valued at $41.5 trillion but alas this figure had shrunk to $36.9 trillion by the end of last year. The grim reaper of real estate deflation has done its work in the business sector, too.
Consequently, total business debt now amounts to 29.4% of business assets---a considerable rise from the 25.2% ratio at the bubble peak in late 2007. What the bullish cheerleaders of recovery constantly forget is that in an epochal deflation like the present one, debts remain at their contractual amounts, even as asset values wither.
So the real question regarding the Fed’s green light for bank dividends and buybacks is quite clear. Banks don’t need more capital to make new loans to households and business. What they actually need is to preserve their current artificially bloated retained earnings accounts in order to protect the taxpayers from the next — virtually certain — banking meltdown.
In this light, the Fed’s action is especially meretricious. If it weren’t in such a hurry to juice the stock market and thereby keep the illusion of recovery going, it might have considered extending the regulatory sequester on bank capital for a few more quarters or even years — thereby preserving a shield for the taxpayers until it has been demonstrated by the passage of time, not by the passing of phony stress tests, that the American banking system is truly out of the woods.
After all, the bottled-up profits currently alleged to be resident in the banking system have not been expropriated by the Fed; they have just been temporarily sequestered — a condition these wards of the state should gladly endure in return for continued access to taxpayer backed deposit insurance and the Fed’s borrowing widow, as well as their license to engage in the lucrative business of fractional reserve banking. Indeed, the fast money should be as capable of pricing in any “excess” capital in the banking system, as it has already been in goosing bank stocks in anticipation of higher profit distributions.
And it is here where the historical data on Bernanke’s 12 out of 13 crashing financial dominoes essentially speaks its own cautionary tale. At the peak of the credit and housing boom in 2006, these 13 most important financial institutions booked $110 billion of net income, and disgorged more than $40 billion of that amount in dividends and stock buybacks.
Would that these fulsome profits and attendant distributions had been real and sustainable, but the historical facts inform otherwise. By 2007, the groups’ profits had dropped to $64 billion, and then in 2008, the 10 institutions which survived to year-end reported a staggering loss of $56 billion. Moreover, if the massive loses incurred by the terrible three — Washington Mutual (NYSE:JPM) , Wachovia (NYSE:WFC) and Lehman — during their final, unreported stub quarter is added to the tally, losses for the year would approach $80 billion.
The unassailable truth here is that in 2006 and 2007 the banks were disgorging phantom profits to their shareholders. When the crunch came in 2008, bank capital had been badly depleted by these unwarranted dividends and stock buybacks.
The danger, of course, was buried in the balance sheets all along. Back in their 2006 heyday, the top 13 financial institutions had $10.2 trillion of total assets — and a not inconsiderable portion of that figure was worth far less than book value, as ensuing events proved. Today the nine banks which are the survivors and assigns of these 13 institutions still have $10.1 trillion in asset footings — hardly a measurable reduction despite the goodly amount of write-offs which have been taken in the interim.
The Fed’s foolish wager — and it is foolish because there is no real purpose other than a momentary boost to bank shares — is that this once toxic asset ridden $10 trillion balance sheet is now squeaky clean. Yet why would any sane observer embrace that dubious proposition?
While the banks have been relieved of mark-to-market accounting, they are still knee-deep in the very asset classes whose ultimate recoverable value remains exposed to the real estate meltdown. Residential housing prices are now clearly in the midst of a double dip, and rates of new construction and existing unit sales are spilling off the bottom of the historical charts
Still, the banking system holds $2.5 trillion of residential mortgages and home equity lines — plus $350 billion of construction loans and more than a trillion of mortgage backed securities. Maybe they have enough reserves to cover the remaining sins in this $4 trillion kettle of residential debt, but betting on housing bottom has been a widow-maker for several years now — and there is nothing on the horizon to suggest that this epochal bust will not make a few more.
Likewise, the banking system is carrying $1 trillion of commercial real estate loans, and the open secret is that “extend and pretend” refinancing is the primary underpinning of current book values. Similarly, the Fed has rigged the steepest yield curve in modern times, but it is a fair bet that as it is gradually forced to normalize interest rates, current record net interest margins will be squeezed. And it is also probable that some of the $2.7 trillion of government, corporate and other securities owned by the banking system may be worth less than par in a world where money rates are more than zero.
In short, a banking system that by the lights of the Fed was on the verge of extinction just 28 months ago could not possibly have gotten well in the interim. In shades of 2006, the nine survivors did report net income of $54 billion in the year just ended, and it is these retained earnings that have purportedly brought bank capital ratios to the pink of health. Then again, the cynic might wonder whether the trading book and yield curve profits of 2010 might not disappear as fast as did the mortgage origination, securitization and trading profits of 2006-2007.
One thing is certain, however, and that is that these behemoths are now truly too big to fail. At the end of 2006, the asset footings of the Big Six — J.P. Morgan, Bank of America (NYSE:BAC) , Wells Faro (NYSE:WFC) , Citigroup (NYSE:C) , Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) — were $7.1 trillion. Saving the system through shotgun marriages in the interim, our financial overloads have permitted the group to grow its assets by 30% to $9.2 trillion.
If you believe that these massive financial conglomerates are a clear and present danger to the American economy, you might opine that they are too big to exist, as well. But even from a more quotidian angle — unless you are in the banking index for a trade — it’s pretty easy to see that so-called banking profits should have remained under regulatory sequester for a few more economic seasons, at least.
David Stockman is a former member of the House of Representatives and a member of the Reagan administration. He currently owns his private equity fund, Heartland Industrial Partners, L.P .
David Stockman: Fed Practices Chrony Capitalism
By David Stockman
This is part one of a two-part series by David Stockman.
GREENWICH, Conn. (MarketWatch) — Someone has to stop the Federal Reserve before it crushes what remains of America’s Main Street economy.
In the last few weeks alone, it launched two more financial sector pumping operations which will harm the real economy, even as these actions juice Wall Street’s speculative humors.
First, joining the central banking cartels’ market rigging operation in support of the yen, the Fed helped bail-out carry traders from a savage short-covering squeeze. Then, green lighting the big banks for another go-round of the dividend and share-buyback scam, it handsomely rewarded options traders who had been front-running this announcement for weeks.
Indeed, this sort of action is so blatant that the Fed might as well just look for a financial vein in the vicinity of 200 West St., and proceed straight-away to mainline the trading desks located there.
In any event, the yen intervention certainly had nothing to do with the evident distress of the Japanese people. What happened is that one of the potent engines of the global carry-trade — the massive use of the yen as a zero cost funding currency — backfired violently in response to the unexpected disasters in Japan.
Accordingly, this should have been a moment of condign punishment — wiping out years of speculative gains in heavily leveraged commodity and emerging market currency and equity wagers, and putting two-way risk back into the markets for so-called risk assets.
Instead, once again, speculators were reassured that in the global financial casino operated by the world’s central bankers, the house is always there for them—this time with an exchange rate cap on what would otherwise have been a catastrophic surge in their yen funding costs.
Is it any wonder, then, that the global economy is being pummeled by one speculative tsunami after the next? Ever since the latest surge was trigged last summer by the Jackson Hole smoke signals about QE2, the violence of the price action in the risk asset flavor of late — cotton, met coal, sugar, oil, coffee, copper, rice, corn, heating oil and the rest — has been stunning, with moves of 10% a week or more.
In the face of these ripping commodity index gains, the Fed’s argument that surging food costs are due to emerging market demand growth is just plain lame. Was there a worldwide fasting ritual going on during the months just before the August QE2 signals when food prices were much lower? And haven’t the EM economies been growing at their present pace for about the last 15 years now, not just the last seven months?
Similarly, the supply side has had its floods and droughts — like always. But these don’t explain the price action, either. Take Dr. Cooper’s own price chart during the past 12 months: last March the price was $3.60 per pound — after which it plummeted to $2.80 by July, rose to $4.60 by February and revisited $4.10 per pound.
That violent round trip does not chart Mr. Market’s considered assessment of long-term trends in mining capacity or end-use industrial consumption. Instead, it reflects central bank triggered speculative tides which begin on the futures exchanges and ripple out through inventory stocking and de-stocking actions all around the world — even reaching the speculative copper hoards maintained by Chinese pig farmers and the vandals who strip-mine copper from the abandoned tract homes in Phoenix.
The short-covering panic in the yen forex markets following Japan’s intervention, and the subsequent panicked response by the central banks, wasn’t just a low frequency outlier — the equivalent of an 8.9 event on the financial Richter scale. Rather, it is the predictable result of the lunatic ZIRP monetary policy which has been pursued by the Bank of Japan for more than a decade now--and with the Fed, BOE and ECB not far behind.
Thinking beyond the Fortune 500 for women
Claudia 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. Japan has been suffering from a real estate asset deflation which followed the collapse of its spectacular 1980’s financial bubble — but not price deflation on consumer goods and services. In fact, Japan’s headline CPI index was 94.1 in 1990 compared to 99.8 during the last quarter of 2010. Thus, during the past 20 years there has been a slight CPI inflation (0.3% annually) — notwithstanding the incessant deflation-fear mongering of the Keynesian commentariat.
To be sure, Japan’s so-called “core” CPI is down several points during that long period, but by all accounts the Japanese people have been eating, driving and heating their homes for the past two decades on a regular basis. Accordingly, they have paid slightly more for mostly imported food and energy and slightly less for everything else. But the overall consumer price index has been flat, meaning that real interest rates have been zero for the better part of a decade now.
And that’s the evil. Free money has not reflated domestic real estate because Japan’s bubble era prices were absurdly high and can’t be regained, and because Japanese real estate — both residential and commercial — is still heavily burdened with debt which cannot be repaid. Yet market economies — even Japan’s cartelized kind — are not disposed to look a gift horse in the mouth. Free money always finds an outlet, and the pathway of choice has been the transformation of the yen into a global “funding” currency.
This sounds antiseptic enough, but it means that in its wisdom the BOJ has invited the whole world — everyone from Mr. and Mrs. Watanabe to state-of-the-art London hedge fund traders — to short the yen in order to finance speculations in the Aussie dollar, the big iron and copper miners, cotton futures, the Brent/WTI spread, and an endless procession of like and similar speculative cocktails. Yet as the speculators rotate endlessly from one risk asset class to the next they can remain supremely confident that their yen carry cost will remain virtually zero. Yen interest rates will not go up because the BOJ is intellectually addicted to ZIRP, and because, in any event, it dare not surprise the market with an interest rate hike, thereby triggering a violent unwind of the yen carry trades it has fostered
In short, the BOJ is sitting on a financial fault line. The post-intervention rip to 76 yen to the dollar was not the work of a fat finger; instead, it represented a real-time measure of the furies bottled up in the system due to Japan’s foolish rental of its “funding currency” to global speculators. Having long ago urged the BOJ to embrace this absurd monetary policy, it is not uprising that Bernanke and his confederates have come to the rescue—for the moment.
It is only a matter of time, however, before the yen explodes under the accumulated short seller’s pressure, and then the lights will really go out on Japan Inc. In the meanwhile, ordinary people the world around will get less food per dollar from Wal-Mart Stores Inc. (NYSE:WMT) and speculators, basking in the wealth effect, will have even more dollars to spend at Tiffany & Co. (NYSE:TIF)
In this context, there can also be little doubt that the Fed is trying really hard to transform the dollar into a funding currency, too. In the name of fighting a phantom deflation, the nation’s central bank has kept interest rates absurdly low—transforming the dollar into a weakling even against the misbegotten Euro, and therefore something which speculators can more safely short.
But just like the case of Japan, there is no sign of CPI deflation in the U.S. Our headline CPI index has gone from 130.7 in 1990 to 218.1 in 2010 — marking a 2.6% annual inflation over the past two decades. And, no, it hasn’t slowed down much during the Bernanke era of deflation phobia.
The headline CPI index has risen at a 2.4% rate in the last 10 years, hardly a measureable de-acceleration; and it has gained at a 2.2% rate in the last five years — a rate at which, as Paul Volcker right observed, the purchasing power of the dollar would be cut in half during the typical American’s working lifetime. Even since the alleged June 2009 recession bottom, the headline CPI has climbed at a 2.1% annual rate.
So there is no deflation — just a simulacrum of it based on the observation that the CPI less food and energy has randomly fluttered around the flat-line on several recent monthly readings. It is not obvious, of course, that the rise of this index at a 1.1% annual rate during the last 20 months of recovery is a bad thing — for at that rate we begin to approach the idea of honest money. But the spurious circular logic of the Fed’s focus on this inflationless inflation index is self-evident upon cursory examination of its internals.
Fully 40% of the CPI less food and energy is owner’s equivalent rent—the one price that is actually deflating and which is doing so precisely due to the Fed’s own policies. Residential rents are falling or flat because the market is being battered with a) millions of involuntary rental supply units owing to the wave of home mortgage foreclosures, and b) an extraordinary shrinkage in the number of rental units demanded due to the doubling-up, and even tripling-up, of destitute households.
Part two of this column will be published next week.
David Stockman is a former member of the House of Representatives and a member of the Reagan administration. He currently owns his private equity fund, Heartland Industrial Partners, L.P.
Dollar Breaks Through Multi-Year Support
Wednesday, April 13, 2011
Crude Shows Signs of Firming
Roller Coaster Day for Stocks
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
It's Ugly! Choppy Trading Appears to Anticipate End of QE2
Monday, April 11, 2011
Budget Symbols, Not Substance!
Today’s quote du jour comes courtesy of Don Boudreaux, author of the Cafe Hayek blog.
“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.
Oil Prices Not Likely to Drop
A number of forces continued to push oil prices higher this week, reaching their highest levels in the U.S. since September 2008.
One factor fueling the run has been the continued decline of the U.S. dollar. You can see from the chart that oil and the dollar historically are negatively correlated. This means that a rise in oil prices generally coincides with a decline in the dollar, and vice versa. The U.S. dollar has seen a dramatic decline since the beginning of the year as oil prices have moved some 30 percent higher. This could be due to fact that roughly two-thirds of the U.S. trade deficit is related to oil imports.
Despite the run up, oil’s upward rate of change is still within its normal trading pattern over the past 60 trading days. Accordingly, this may imply that it isn’t a spike and we haven’t crossed into the extreme territory like we experienced in 2008 and 2009.
Conversely, oil prices are positively correlated with gold prices, which also saw a bounce this week. Looking back over the past one- and 10-year periods, oil and gold have roughly a 75 percent correlation. This means that three out of four times, when prices for one go up, prices for the other increase as well.
Another factor pushing prices higher is the seasonal strength that oil prices historically experience leading into the summer driving season. This chart shows the five-, 15- and 28-year patterns for oil prices. You can see that prices historically bottom in February before rising through the end of the summer.
Rising oil prices are also a result of what the Financial Times calls the “new geopolitics of oil.” The FT says three elements creating this new environment are becoming clear:
- 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.
A Deutsche Bank chart plots the share of population under the age of 30 for selected North African and Middle Eastern countries against the unemployment rate of this group. You can see that large oil producers such as Saudi Arabia have a high level of unemployment among youth populations.
This is why King Abdullah of Saudi Arabia has announced a total of $125 billion worth (27 percent of the country’s GDP) on social programs for the public. For King Abdullah, this is the cost of keeping peace but has driven up the breakeven price for Saudi oil production to $88 per barrel, according to the FT.
Keeping these young populations happy and working is not only domestically important for these governments but for global oil markets as well. You can see from this chart that a significant portion of the world’s oil production comes from the Middle East.
With the unrest in Libya—a top-20 oil producer—essentially knocking out the country’s entire production, any further unrest in another country could threaten global supply. Upcoming elections in Nigeria have the potential to disrupt production for the world’s fifteenth-largest producer.
But it’s not just geopolitics that is threatening production. Natural decline rates from mature fields such as Mexico’s Cantarell oil field are starting to make a dent in global production. Reuters reported this morning that Norway, the world’s eleventh-largest oil producer, is experiencing a significant slowdown in production from the Oseberg oil field in the North Sea. Production is expected to be cut by 26 percent in May to only 118,000 barrels per day.
Meanwhile, oil demand has been picking up significantly in both emerging and developed markets. Oil demand in China and the U.S. has been rising since mid-2009, well before the uprisings began in the Middle East.
In China, a big driver has been growth in the Chinese automobile market. Auto sales increased 2.6 percent in February, and March data is expected to show another increase when the Chinese Auto Association releases March auto sales figures over the weekend.
The G7 economies have been in an up cycle since last year. In the U.S., employment rates and consumer spending have been steadily improving. Oil prices rising too fast remains a threat to this recovery but BCA Research estimates that oil prices need to rise above $120 per barrel before “significantly undermining consumer and business confidence.”
Sunday, April 10, 2011
Fed's Strong Correlation to Rising Prices
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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