Archive - Aug 30, 2011 - Story

Despite the mind-numbing mantra we constantly hear from our political leaders and central bankers that inflation does not exist, there are certain parts of our lives where even a freeze-dried coffee bean can see that prices are clearly rising: At the grocery store. At the doctor’s office. At the gas pump. One of these places is also our hallowed institutions of higher learning. It’s no secret that the cost of university education, especially in the United States, is staggering. Tuition at private schools in the US averages $30,000 annually, and students often graduate over $50,000 in debt. This leads to a fancy form of indentured servitude; students with this kind of debt load are forced to take the first paid work they can find, and they’ll work for the next 14-years of their life just to start back at zero.

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc. Market Recaps to help improve your Trading and Global knowledge

During the last FOMC meeting, we learned that the number of dissenting hawks at the Fed has increased to a whopping 3. Well, make that 2 after Minneapolis Fed's Kocherlakota just basically stuck his tail between his legs. To wit: "the disinflationary pressures of 2010 should soon reappear in the form of a sharp decline in current and expected core PCE inflation rates. In that eventuality, increasing policy accommodation might well be appropriate." One dissenter down, two to go. This also means that as we have been saying forever, all that would take for QE3 is another "deflationary" market flush: not a low-volume algo driven levitation, not a sideways move, a plunge. And when that happens, the Fed will do QE3. The rest is just posturing.

Kindly-looking, ukulele strumming, no tax paying, birthday celebrating, grandfather figure Warrenn Buffett is angry...

The entire premise of the engineering mindset is that problems can be broken down to a small set of quantifiable inputs, processes and outputs. This works fine when measuring and controlling water flow, flow of electrons, and other linear systems, but it is catastrophically mis-applied when Know-It-Alls besotted by their success in extremely limited linear systems attempt to "solve" non-linear problem-sets with linear "solutions." Case in point: war is highly non-linear. The "Whiz Kids" at the Pentagon did not even understand the problem-set, or the nature of war; how could their simplistic, Know-It-All "solutions" possibly work in the real world? Most of our problem-sets are non-linear, and are thus inaccessible to engineered solutions. If we consider the stock market a problem-set, then shouldn't it be possible to engineer 11 good trades in a row? After all, the data is all there for the taking. If a whiz kid could engineer 11 trades that doubled the capital invested--not that impossible when trading futures contracts or options--then in 11 iterations a mere $500 blossoms into $1 million. So go ahead and engineer a "solution" to the stock market "problem" which yields 11 good trades in a row. The problem is that the market--and most of life--is non-linear, and "solutions" cannot be conjured out of simplistic linear models and inputs which cannot be quantified except with a highly illusory accuracy.

While it is unclear if geopolitical news, or expectations of imminent QE3 is what just drove WTI to $89, the update from AP that Israel has sent two warships to the border with Egypt will likely not help the oil deflation case. From the AP: "The Israeli military says it has sent two more warships to the Red Sea border with Egypt following warnings that militants are planning another attack on southern Israel from Egyptian soil. Earlier this week, Israel's military ordered more troops to the border following intelligence reports of an impending attack. Israel's home front minister said Tuesday that militants from the Gaza-based Islamic Jihad are in Egypt's Sinai peninsula waiting to attack. Gunmen who infiltrated Israel through the porous Egyptian Sinai border killed eight Israelis earlier this month. The attack sparked calls to increase security on both sides of the frontier and created new tensions between Israel and Egypt. No changes in security alignments were observed on the Egyptian side of the border." And as the market now gyrates violently without any clear idea what to do until Thursday's ISM and Friday's NFP either seal the deal for QE3 or not, expect geopolitical headline risk to return with a vengeance.

Belarus, which recently has been fighting hyperinflation after devaluing its currency by over half, just hiked its central refinancing rate by 5%, from 22% to 27%. We look forward to Comcast's clown channel to pitch Belarussian equities next as the local stock market is poised to outperform every single stock market in the world, complete domestic currency devaluation aside. NB: This is what hyperinflation looks like.

The charts below demonstrate the 6 month change in the 6 month forward looking Consumer Confidence outlook: in other words, this chart measure just how deceived US consumers have been by hopium consumption 6 months ago compared to reality now. In short: 2011 has been the most disappointing year for Americans in history. Whether it is due to excess hopium consumption or not... well, it is not irrelevant.

Goldman is not used to being snubbed when it comes to its policy recommendations. Which is what essentially happened during the Jackson Hole speech in which Bernanke left the QE3 door slightly open... but not enough to appease Bernanke's Goldman alum superior at the New York Fed. As such, since at least a few days have passed without Goldman reminding of who calls the shots, here is probably the most comprehensive summary of the Jackson Hole aftermath, and what the market will now expect to come out of the Fed on September 21. Whether Bernanke will go ahead and listen to Goldman, is unknown - the Fed risks incurring the wrath of Goldman at its own peril. What is perhaps most interesting about self-Q&A are the Goldman  proposed "radical" measures that the Fed could consider to employ in addition to LSAP and Twist which so far have proven to be ineffective: "There are three main ways in which the Fed could be more radical: (1) an extension of the QE program into markets other than Treasuries and agency MBS, e.g., private sector securities, (2) a much bigger QE program, up to the extreme version of a promise to buy as many securities as needed to hit a specific yield target (i.e. a "rate cap" further out on the yield curve as then-Governor Bernanke suggested back in 2002), and (3) an explicit or implicit change in the Fed's policy targets." If these are truly hints as to what the Fed should do, then we hope readers have their gold $3000 calls firmly in place.

August consumer confidence plummets from 59.2 to 44.2, far below consensus of 52, dropping to its lowest level since April 2009. But, but, two insolvent Greek banks merged yesterday to make a really big insolvent Greek bank. Oh well: Americans don't care. And even uglier is the 6 month outlook chart which collapsed from 74.9 to 51.9, one of the biggest monthly drops in history. This sets the stage for the ISM, for NFP, for further GDP cuts, and for September 21.

The much delayed Case Shiller update for June is out, and it is both worse and better than expectations: year over year, the number printed at a -4.5% decline, slightly better than consensus of -4.6%, while the month over month change was -0.1%, on expectations of an unchanged print. Stripping aside the noise means that the housing market is crawling along the bottom after double dipping months ago but at least it is not imploding. And since this report is nearly 3 months old, it does very little to indicate what is actually happening with the economy.

Who would think that all it takes for gold to surge by $40 in under an hour is for the Fed to resume the old song and dance. Yet that is precisely what happened: ever since Chicago Fed president Evans sat down with Steve Liesman to discuss that he would be in favor of more easing, and saying he believes in "room for accommodation" and that we "still need to do more on monetary policy", gold soared from under $1790 to over $1830. And confirming that gold will go far higher is his statement that "Fed policy was not a driver of the commodity price surge." In other words, these buffoons have not learned anything, and the commodity price shock is coming. However, as usual, it will be blamed on speculators. Luckily the CME can hold them in their tracks with a relentless series of margin hikes. Or not. When will the CME finally hike margins on printer toner cartridges?

• German Chancellor Angela Merkel faces growing resistance within her ruling coalition over expanding the powers of the EFSF, according to WSJ. Meanwhile, a senior German government lawmaker insisted that the parliament should have a greater say in future Eurozone bailouts
• According to S&P, slow growth increases risk of a double-dip recession in Europe
• The appetite for risk was dented further after a 10-year BTP auction from Italy registered above 5% average yield
• The International Accounting Standards Board criticised the inconsistent way in which banks and insurers have been writing down the value of their Greek sovereign debt
• Strength was observed in USD and JPY amid risk-averse trade

Quiet day with FOMC minutes due out in the afternoon, Case Shiller confirming more worsening in housing, and Conference Board consumer confidence plunging in August. European headlines may once again reappear.