Archive - May 2011

While ultimately its own entity, the Federal Reserve IS a political institution. True, they pretty much do whatever they want… but only to a certain degree. The Fed can’t just unleash $500 Oil in six months without causing full-scale rioting. And money printing and interest rates don’t do much as defense against angry mobs. So with political heat turning up due to price increases, not to mention we’re approaching an election year, the Fed needed to step back for a bit. This is why they didn’t announced QE 3 yet.

And so another frequently cited by Zero Hedge strategist, Guggenheim's Scott Minerd, steps up to the plate and makes the case that all those expecting an end to quantitative easing may well end up being disappointed (much to the joy of government darling - stocks; and more importantly the government's black horse - commodities). Minerd's speculation is based on what is glaringly obvious: the forced take down of commodity prices does nothing but provide the Chairman with the green light he so needs in order to proceed with further easing: "The case for extended low rates and possibly even QE3 grows stronger given the recent sharp declines in agriculture and energy prices. If price pressures from food and energy prove transitory, as Bernanke predicts, then inflationary expectations are likely to ease by the end of the year. A decline in inflation would certainly make the risk/reward trade-off for QE3 more attractive to the Fed chairman." Basically, the paradoxical outcome is that the lower the most "hated" commodities: crude, gold, silver drop, the higher the probability the Fed takes the step that sends them surging to new record levels. Elsewhere, Minerd once again follows our thinking: the econom is the primary catalyst for further easing (especially in light of fiscal easing being impossible under the current political breakdown): "What
would be Mr Bernanke’s motivation to endure the political fallout of
QE3? The same motivation for QE1 and QE2: namely, stimulating growth to
help employment recover. If economic growth stalls, this will become the
chairman’s primary motivation. Looking ahead, the expiry of tax cuts in
2011 and a government deficit reduction programme (likely to take
effect as early as 2012) will present real headwinds to growth." Lastly, doing a comp to that endless QE basket case demonstrates that at least from the Fed's perspective, the US has much more capacity for monetization as a percentage of GDP, to go on with LSAP for much, much longer: "The balance sheet of the Bank of Japan equals about 30 per cent of Japanese GDP. If the Fed were to hold as many assets on a relative basis, it could conduct a further $1,800bn worth of quantitative easing. That would amount to QE3, QE4 and QE5 (at the same size as QE2) just to get to where Japan is today. If US economic growth stalls, Mr Bernanke, an expert in all things deflationary, could view Japan as an imperfect but relevant precedent for further quantitative easing." And there you have it.

Inspired, among others, by the typically apocalyptic, ecological maunderings of Jeremy Grantham (the renowned investor here providing us with classic evidence of the general non-transferability of specific expertise from one metier to another), the recent overwrought oil market has brought the Exhaustionists out in full force, each plaintively wailing of the dangers of Peak Oil (as well as Peak Copper, Peak Corn, etc.—though never, thankfully, Peek Freans). As is always the case at such times, the name of M. King Hubbert has been given a great deal of air, as if the old rhetorical trick of argumentum ad verecundiam should be decisive in this matter. Yes, to give this particular devil his due, he did accurately predict that US onshore oil production would top out in the late 60s/early70s, so assuring his prophethood for ever, especially since the validity of the estimate became recognised amid the traumas caused by the first Oil Shock. His other glances in the crystal ball have, alas, not borne out quite so well, however.

Another week, another 400+ jobless print, another prior upward revision: the DOL does it like clockwork. In the week ended May 14, initial jobless claims were filed by 409,000 people (to be revised to at least 412,000 next week), which while is a drop from last week's upward revised 438,000 (originally 434,000), better than consensus, yet with the number being well above 400,000, it means that the economy continues to be a net loser of jobs. Lastly, while irrelevant, the 4 week moving average printed at 439,000, highest since November, due to that outsized print from two weeks ago. This number will rise over the next week as well. Continuing claims dropped slightly from an upward (of course) revised 3,792K (first 3,756K) to 3,711K, beating expectations of 3,278K. Looking at the 99 week cliff, it appears an equilibrium has been reached as 49K lost Extended Benefits in the week ended April 30, offset by 53K people added to EUCs.

There's a funny thing about the New World Order: it eventually gets too big and bites the hand the feeds it. Enter the PBoC: "The new IMF leadership needs to reflect changes in the world economic order and be more representative of emerging market economies, Chinese central bank governor Zhou Xiaochuan said Thursday in his first public comments since the arrest of Dominique Strauss-Kahn. "The senior management team of the IMF should better reflect changes in world economic patterns and should be more representative of emerging market economies." Translation - no more European of American cronies. It is also probably safe to say that Lagarde's odds of pulling the white smoke out of the conclave bag have just plunged. It is also safe to say that with China now unofficially Europe's backstopper (and there were those wondering why China is buying all those Spanish and Portuguese bonds), what China wants, China gets.

• Japanese economy shrinks in first quarter (FT)
• Power Shifts on Foreign-Policy Team (WSJ)
• Government Prays a Bigger Sucker Is Out There (Bloomberg)
• Row within Europe over Greece (FT)
• U.S. Hits Syrian President With Sanctions (Bloomberg)
• Think prices are high? Just wait ’til summer (Post)
• Top European Bank Officials Urge Greece to Persevere on Fiscal Overhauls (WSJ)
• Medvedev Makes a Slight Break With Putin (WSJ)
• U.S. Grants Asylum to Chavez Opponent (WSJ)
• Sex Scandal Is Another Travesty at IMF Door (Bloomberg)

Analysts expects today's Jobless claims to decline from last week's soon to be upwardly revised 434,000 to 420,000. We believe that there is a risk the number will be worse than expected due to ongoing layoffs in the auto sector as the "Japan" effect refuses to go away. If this does not happen, rain, flooding, drought, snow and UV lamp exposure will be blamed, not necessarily in that order. But not the economy. Never the economy. We also get existing home sales and the Philly Fed index.

S&P 500, Dow Jones, Nasdaq, Russell 2000, Nymex Crude Oil, Comex Gold, EURUSD, GBPUSD, USDJPY

First twitter and facebook took down several North African regimes where Ben Bernanke drove the people to a hunger-based desperation, now twitter is poised to topple the Spanish government. At least that appears to be the conventional wisdom in Spain, where for the fourth day people across the country are protesting record high (21%) unemployment and various other economic slowdown after effects. CNN reports on the latest out of Spain.

Contrary to conventional wisdom, America does not import the bulk of its crude from the volatile middle east region, but from its sleepy and unremarkable northern neighbor (by a factor of two compared to the second largest source of crude). Which is why the recent eruption of pervasive wildfires in Alberta, which have substantially disrupted production, probably should have far more of an impact on crude risk perception than what happens to 2 million of daily crude output out of Libya, most of which does not even reach the US. From Reuters: "Canadian heavy crude prices have changed little despite wildfires raging in northern Alberta and forcing production cuts, showing there is plenty of supply in storage, market sources said on Wednesday. Western Canada Select heavy blend for June delivery fetched around $17.30 a barrel under benchmark West Texas Intermediate crude, close to levels of a week ago. Dozens of forest fires that have spread in recent days have led to the shutdown of more than 100,000 barrels a day of output in the north-central Alberta region, most of it due to the outage of the 187,000 barrel a day Rainbow pipeline. The southern leg of the line, operated by Plains All American Pipeline LP, was shut due to the blazes. The northern leg has been out of service since a rupture and oil spill in late April." Perhaps the reason why none of this is perceived as a risk is that for about a decade now neither supply nor demand have actually been factors in determining equilibrium prices, which in turn is defined almost exclusively by the amount of free liquidity in the system, and correspondingly, speculator, and margin, scapegoating.

The most anticlimatic news of the week is that, as everyone expected, DSK has resigned his post as IMF head. "“I want to devote all my strength, all my time, and all my energy to proving my innocence,” Strauss-Kahn said in a statement released by the Washington-based IMF four days after his arrest on sexual-assault charges. The fund said it will comment “in the near future” on the succession. Strauss-Kahn, 62, had been leading polls for France’s 2012 presidential election." And with his passage, the Feudal (as defined by El-Erian) "conclave" to pick his successor begins. Per Bloomberg: "European officials, who have picked IMF heads for 65 years under a deal that also gives the U.S. the lock on the top World Bank post, moved to retain the privilege, with Sweden backing French Finance Minister Christine Lagarde. Russia and South Africa have called for an emerging-market candidate, while some Asian policy makers suggested someone from their region." And now the specter of mutual assured destruction posturing shifts to selecting a desired candidate quickly. "Time is of the essence,” said Julie Chon, a senior fellow at the Washington-based Atlantic Council and former adviser to the U.S. Senate Banking Committee. “The longer the IMF allows the specter of uncertainty to hang over its leadership, the more exposed it becomes to the jittery actions of sovereign debt and foreign-exchange traders who have been speculating on what the leadership vacuum means for their portfolios."

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