Archive - Dec 2013

After having followed a zero interest rate policy strategy and facing a further deteriorating economy in an environment of falling prices (deflation), the Bank of Japan (BoJ) announced the introduction of QE on 19 March 2001 and kept it in place until 9 March 2006. The BoJ chose for a very orderly and gradual unwinding of its government securities portfolio, by continuing its regular purchases of these securities (i.e a taper and not sale).  The market rejoiced at the normalization for a week or 2... before dropping 24% in the following 2 months. Of course, that was a "policy mistake"; the Fed knows this time is different.

"...as an investor, nearly always if you buy panic and you know what you are doing, and then hold on for a number of years, you are going to make a lot of money.

You also have to be sure that your crisis or panic is not the end of the world, though..."

We have tried a number of times (here, here, and here) to explain the simple math behind the populist call for a higher minimum wage (that appears to be founding the President's new class warfare) but in the following clip, we hope, Peter Schiff visits a local Wal-Mart in the hopes of explaining that magic money trees are not real.

The effects of the massive monetary inflation of recent years are so far mainly reflected in asset prices. Modern art has become a major magnet for investors, whereby one gets the impression that this is truly a gargantuan bubble by now. Works of art are unique, so there is really no yardstick by which one could make sensible comparisons regarding their valuations, except to note that prices today are at multiples of the prices paid in the not-too-distant past. When a Japanese insurance company bought van Gogh's 'Vase with Fifteen Sunflowers' for $39.7 million in 1987, the world was shocked that anyone would shell out so much money for a single painting. It was rightly seen as an outgrowth of Japan's bubble excesses of the 1980s at the time. Today it actually looks like they made a great investment. No-one bats an eyebrow anymore at anything that is not sold for more than $100 million. So if you ever wonder whether there is really an inflationary bubble underway, the answer is clearly, yes, there is.

Presented with "no comment"...

Despite yesterday's governmental reassurance (a la Venezuela and Argentina) that there is no inflation in the US, the reality for the average man in the street is a little different. We have previously noted that gas prices are 25% above their average price of the last decade but it is another staple that is more worrisome for many in America. As CNSNews reports, the average price of ground beef hit an all-time high this week at $3.61 per pound (up from just $1.82 per pound in 1980). As both a home-cooked and fast-food staple, the price of ground chuck alone has risen 45% in the last 10 years. Nope, no inflation here...

There is a rising belief that when the Federal Reserve begins to taper that interest rates are set to rise.  It is believed that as rates rise due to stronger economic strength that the stock market will act as a hedge against falling bond prices. However, historically speaking rotating from bonds to stocks after the initial spike in rates has occurred was akin to jumping from the "frying pan into the fire."

The S&P 500 rallied well over 40 points (and the Dow up over 350 points) off the FOMC knee-jerk lows but bonds were largely unimpressed. USDJPY surged to new 5-year highs over 104. Bonds weakened, rallied,a nd then leaked back higher in yield to close almost unchanged from the FOMC announcement. VIX was smahsed back under 14% - its biggest drop in over 2 months.

*S&P 500 RISES 1.7% TO RECORD 1,810.79 AT CLOSE

DOW AVERAGE INCREASES 1.9% TO RECORD 16,171.12 AT CLOSE

We can only imagine what would have happened if he'd tapered $20 billion?

The FOMC decided to cut the pace of its asset purchases to $75bn/mo, but offset this with a qualitative enhancement to the forward guidance. The Committee's assessment of the economic outlook was somewhat more upbeat. We see today's statement as slightly hawkish relative to expectations. The fact that President Rosengren dissented and President George did not is consistent with that.

While admitting that the Fed "doesn't fully understand" all the reasons behind the slower pace of growth, the following 10 statements from Ben Bernanke's final press conference seemed to sum up perfectly the message he wants everyone to understand (and perhaps some he doesn't)...

UPDATE: S&P 500 crosses 1,800 (35-point swing off lows - which perfectly hit the 50DMA once again); USD starting to weaken along with bonds

Well that escalated quickly... Stocks cracked lower instantly on the taper news then soared above recent highs ripping through the order book... but are fading back now as we prepare for Bernanke's last press conference. VIX was smashed lower (from over 16.6% to 14.1%). Gold and stocks spiked up pre-FOMC in an interesting move. Bonds are rallying as rumors of BoJ buying 5Y hit the market and the USD (despite considerable vol) is back to unch.

The taper has begun... but the uber-dovish rate guidance is winning for now. We are sure there will be tears as reporters' emotions spill over at the loss of Main Street's all-knowing oracular savior. Once again, for the benefit of those not paying attention, "QE is for Main Street", "The Fed does not target equity market levels", "Tapering is not tightening", and "Forward guidance is effective." The king is dead, long live the queen...

It would seem he has a lot of 'splaining to do...

The "swap" of $10 billion of asset purchases for a lower employment threshold and lower-rates-for-longer forward guidance knne-jerked stocks dramatically higher (for now). But while that was occurring, the Wall Street Journal's Hon Hilsenrath was busy preparing 712 words in a record-setting 3-minutes to explain how the Fed remains data-dependent... and will remain dovish for longer than previously thought.

Despite the world of mainstream media pundits proclaiming the US is recovering nicely and that a taper is priced in (and the warning that the 5Y auction gave this morning that it's not), markets are already reacting violently to the Fed's decision to announce a small 'taper' (and more dovish forward guidance)...

• *FED TAPERS QE TO $75 BLN MONTHLY PACE, STARTING IN JANUARY
• *FED SAYS `FURTHER MEASURED STEPS' POSSIBLE ON TAPERING
• *FED: EXCEPTIONALLY LOW RATES UNTIL JOBLESS FALLS WELL PAST 6.5%

We now leave it to Ben and his final press conference to explain his decision... and, of course, make sure everyone remembers "QE is for Main Street", 'tapering is not tightening' (despite Jim Bullard telling us it is), and just how effective 'forward guidance' is.

Pre-FOMC: S&P Fut 1771 (spiked pre-FOMC), 5Y 1.55%, 10Y 2.875%, VIX 16.5%, Gold $1236 (which was spiking pre-FOMC), EUR 1.376

Of the 68 "economists" (which incidentally none of which are "qualified") that Bloomberg surveyed, 24 believe a taper is coming with the majority expecting a $10 billion cut in the asset-purchase program.