Archive - Sep 13, 2012

Earlier we explained why Bernanke's actions today mean that the Fed Balance Sheet will likely grow to over $4 trillion by the end of 2013. Critically this flood of liquidity will raise the nominal price of every asset (from whimsical pieces of stockholder paper to barbarous relics and black gold). Some of these assets, like stock prices and high-yield credit spreads do have point-in-time 'value limits' to their price - though at times it seems a dream that fundamentals would ever matter again; but some have less of a binding constraint - such as gold. Should the Fed proceed, as seems likely, and do its worst/best to blow its balance sheet wad then we estimate Gold will be priced at least $2250 per ounce by the end of 2013 (of course higher if the Fed sees no evidence of recovery). Meanwhile, deeper underground, the world's mainstay source of energy, WTI Crude oil, could jump to record highs over $150 per barrel (which just happens to coincide with the 'pegged' value of oil in gold). It will be interesting indeed to see how the world's socio-economic infrastructure hangs together should that occur - can't happen? Different this time? Indeed it is, now that Ben hit the big red 'panic' button.

If you live long enough—knock on wood—pretty soon it’ll add up to real money.

"Yellow journalism" – which seems almost the only kind we have these days dominates our newsflow, but the truth is out there. As with everything else though, it's subject to Pareto's Law. So, 80% of what's out there is crap, and 80% of what's left is merely okay. But that remaining 4% of quality, uncensored, free information flow is extremely valuable. The terminal corruption of the major news corporations and the lack of interest in seeking the truth among the general population augurs very poorly for the prospects of the US and the current world order. This creates speculative opportunities, but prospects for mainstream investments are not good. Western civilization is truly in decline and far down the slippery slope.

Today's Zero Hedge articles in audio summary! "Bernanke's announcement made me QE in my pants. Now featuring revised grammar!" Everyday @ 8pm New York Time! 

Oaktree's Howard Marks is mildly more positive than normal - due mainly to his belief that most people are not uber-bullish (though perhaps less so after today) - but his latest letter expounds in succinct detail on all the risks that await us (notwithstanding nominal price eruptions courtesy of QuEnfinity). Critically, he notes:

These days we hear little about anything other than macro considerations. Thus investors believe more than ever [as security movements are highly correlated] that the route to investment success lies in correct judgments about the macro future - giving rise to 'risk-on, risk-off' investing.

Playing the market in the short-term based on macro forecasts is one of the many things in investing that could add greatly to results if it could be done right... but it can't, certainly not consistently!

Summing up: "The world seems more uncertain today than at any other time in my life."

With the U.S. presidential election right around the corner, Americans are getting themselves all in a tizzy to go to the voting booth and remind the holders of public office who they work for.  Because it’s a presidential election, the stakes are looked to as even higher as the media paints the contest between Barack Obama and Mitt Romney as a conflict with extreme consequence.  The statist tramps known as mainstream journalists are championing the race as a great ideological battle.  The fact that the candidates differ little on policy and vision is purposefully avoided.  To the political and intellectual establishment, the show must go on.  Their way of life depends on it. No matter how hard boobus Americanus is kicked in the teeth with his own inability to have an effect on government, he still feverishly casts his ballot with faith locked into the system. As Gary North puts it, “democracy is window dressing for elite control.” Sadly, unless there is a radical change of thinking, mankind’s intellect will finally begin to resemble that of a dog who after being beaten unmercifully, happily returns to his master’s side ready once more for another round.

Remember Peregrine Financial, the firm that just like MF Global, ended up vaporizing $200 million in client money after it was revealed that its suicide-challenged CEO Russell Wasendorf was stealing operating cash for two decades under the nose of the CFTC? Yes? Good. Because in four days, said CEO will be relaxing in the comfort of his own home. It seems odd to us that the man who caused hundreds of clients to lose up to all of their life's savings, will be hanging out on his leather sofa, if only until such time as a one-way first class ticket to a non-extradition country is consummated. But who knows: perhaps this is all part of the "New Fairness Normal" where fraud and crime is if not rewarded, then certainly ignored.

The Fed panicked. It is extraordinary that the Fed would announce an open-ended "we'll print as much as it takes, as long as it takes" policy. Chairman Bernanke is sending a signal to the markets and to government that the economy is bad and getting worse and that the Fed will do its part as everyone expects them to do. This is a clear signal to the markets and the world that the Fed stands for monetary inflation. They don't know what else to do. Here is the fallout.

What took Ben Bernanke sixty minutes of mumbling about tools, word-twisting, and data-manipulating to kinda-sorta admit - that in fact he is lost; Ron Paul eloquently expresses in 25 seconds in this Bloomberg TV clip. Noting that "we are creating money out of thin air," Paul sums up Bernanke's position perfectly "We've Lost Control!" From mal-investment to Bernanke's frustration and the unintended consequences, the full 5-minute interview is a must-watch.

What happens next...

In case you missed it. Markets soared on the back of possibly the darkest day in central-planning banking largesse. Gold and Silver were the biggest winners, though stocks will get all the attention we are sure. Treasuries initially sold off on the news that this was an MBS program (and mortgage spreads collapsed from already record tights) but by the close, Treasury yields had almost round-tripped to pre-FOMC levels. For the first hour or so after the news, all assets moved in sync and correlations soared across risk-assets, but as the afternoon wore on, FX carry consolidated, Treasuries retreated (and 2s10s30s fell), dragging risk lower leaving stocks up near their highs in a world of unicorns and free-money. Notably, it appeared that stocks caught up to high-yield credits' recent exuberance and then found little ability to push ahead. HYG (the high-yield bond ETF) remains notably rich to real bond prices. VIX tumbled under 14% (down almost 2 vols) but notably the term structure of vol collapsed even more - as it seemed the QuEnfinity prompted longer-term hedges to be lifted. A remarkable day in many ways as the S&P crosses over 14x P/E and AAPL over 20% of the Nasdaq-100.

If there was one absolutely must see moment exposing everything that is broken with the Fed's brand new policy of QE-nfinity, it was this exchange between Reuters' Pedro da Costa and the Chairman. It explains, beyond a reasonable doubt, that the only goal the Fed now has is to reflate the stock market bubble to previously unseen levels, to focus on generating jobs although not for everyone but only for Wall Street, consequences be damned, because by the time the consequences arrive, and they will (just recall that subprime is contained) they will be some other Fed chairman's problem. Bernake's term mercifully runs out in January 2014.

There is an ongoing debate among market participants over the reasons for asset elevation - global growth expectations? liquidity hose-pipes? European tail-risk reductions? or some combination of the three. Citi's Steven Englander attempts to uncover the changing face of the Fed's QE impact - with some very specific findings this time around. Gold is by far the winning asset relative to the S&P and even currencies. This is consistent with a view that there will be a lot of liquidity in the system but that neither US nor global prospects are as attractive as they were in the past.

We don't make these things up...