Guest Post: Keep The Faith....

Tyler Durden's picture

From Strategic Alpha

Keep The Faith....

Bernanke is obviously as confused as we are over the state of the US economy: QE is coming but not yet:

Again from the Fed I hear a lot of hope rather than substance about the ability of the US to recover in Q2. It is far from clear, even to them, that this will happen and thus monetary policy is on hold and it appears to me that QE will run its course to the end of the month and be kept as a backup in case equities dump, which actually looks quite likely to me. You can tell the markets are as confused as Bernanke is, as the reaction to his speech was a big fat zero! Equities could start a rather nasty slide now and to me QE3 will be seen very quickly if it looks like a rout. Bernanke needs to keep the next launch a surprise in my view and he may not communicate its use to gain maximum impact. To me equities still hold the key to a lot of this in his mind and they simply cannot sustain these crazy levels without his liquidity feed. Mind the gap as the crutch is being taken away!

Bernanke was certainly not bullish on the economy (I am sure you have all read the speech by now) and it was interesting to hear his views on inflation but I think he is playing lip service to the hawks and politicians who are worried about letting the Genie out of the bottle. Reading between the lines, he has failed his mandate and needs to invigorate both employment and housing and that is not going to happen at all if rates go up and he knows it. He must also be aware that QE2 failed to stimulate either! But what other options does he have? Trash the Dollar I guess but they are in no position to allow a collapse as the holders of US assets would dump the lot and so they will not talk it lower. More benign neglect as it quietly falls. I reiterate that the world is very aware that it needs a healthy US economy and that applies to the EU, China and all the world’s exporters and this is why I believe there is an accord to allow a controlled fall in the Dollar. Don’t for one minute believe that Geithner and Bernanke want to pursue a stronger Dollar. That is total garbage. Even he admitted that the only way the Dollar will rally is if he fixes the economy and we are a very long way off that!

Bernanke sees growth as "likely to pick up somewhat in the second half of the year" as manufacturing activity normalizes and gasoline prices ease a little”. That doesn’t sound very reassuring to me and what if gas prices don’t? More hope. Whilst he calls for a fiscal consolidation plan, he made it quite clear that a draconian move would kill the economy. (Are you listening Mr. Osborne!). He was certainly not able to answer which he would prefer; a short term stimulus or long term tightening! I do not however believe that he sees inflation as a problem for the US (as he hasn’t created it yet) in the data he considers important and with weakness in the jobs and housing markets coupled with rising food and fuel costs, the consumers earnings continue to fall. Demand will fall and consumers may decide to deleverage at the same time. This will create the opposite; deflation in the near-term. If we do not see data improve into September then I fear that the hope will disappear and that is what happened in 1932 after the ’29 crash! He cannot and will not allow that and he believes that equities hold the key to stability and confidence. QE will be back if data doesn’t turn soon.

The UK economy scares me as utility bills rise and wages stagnate: Job losses look inevitable:

To my mind the weakest economy in the developed world is the UK and actually most of the global economies look more solid than this one. The data is beginning to ring alarm bells for me and surely investors are being advised away from here, as if we look at the headwinds the consumer has to face, there must be better alternatives elsewhere and GBP will surely fall. We are now seeing another rise in utility bills as gas and electricity bills are set to rise by 20% and 10% respectively from one of the largest suppliers so others will surely follow. This could not come at a worse time as the poor (that is exactly what he is) consumer is faced with higher VAT, higher utility costs, higher essential costs and stagnant wages! It is a nightmare scenario that will spark a collapse in demand and a change in spending and saving habits. Do you still think they can raise rates at year-end? No nor do I. Bernanke is concerned that any drastic attempt to cut the deficit could kill the US economy and the government in the UK seems hell bent placating rating agencies at the cost of the economy. This will not help. I am bearish GBP still. Quite why the UK has an AAA rating is beyond me as Osborne will fail in his attempt to reduce the deficit!

The economists were telling us that the private sector would pick up the slack from the public sector job cuts that were needed to help reduce the rise of the deficit. (Again they are still not reducing the deficit, just the speed of its rise). This is not happening and to me there is a disturbing trend that suggests unemployment here is about to pick up. There has been a "worrying" slowdown in the number of new jobs being created in the UK in the last month, a new report shows. The latest figures from REC/KPMG, covering mid-April to mid-May, reveal the slowest growth of permanent and temporary appointments in seven months and more disturbing was that pay growth is actually falling! Earnings will certainly not pick up if unemployment goes up and competition for jobs increases.

The lack of confidence in the consumer is beginning to show up in sales data, as we suggested it would, even with some signs that shop inflation is beginning to fall. To me we have a situation here where inflation is purely generated externally in essential costs and the consumer will adjust and put off any unnecessary purchases of non-essentials. The retailers are going to find this very tough to deal with and earnings will suffer and the High St could become rather quiet. With falling demand the BoE has a very tough battle on its hands but any hike in rates would finish this economy off and we are already seeing house prices begin to slip and that is the last bastion of confidence for most. GBP crosses look set to fall further in my view.

The global economy looks set to stall:

Why are economists so convinced that the world faces just a “soft patch” as to me the signs look dreadful and the policy tools are all blunt. Rates in the UK and US are pinned to the floor and there is little that can be done if the rise in food prices is driven by natural demand as the global population explodes. The room for macroeconomic policy to engineer a rebound is much more limited. Everyone I hear talks of commodities stabilising but what if they don’t? It is far from evident that things will change, especially in food prices so consumers will be forced to change. The percentage of earnings spent on food and utility costs is spiralling higher and something will have to be sacrificed as earnings are still not keeping up. This is going to be extremely tough as consumers are going to have to change their lifestyles and credit is not going to be offered or indeed wanted!

Just look at the data, as PMI’s are rolling over and manufacturing and IP looks to have peaked and most of the recent strength was due to inventory build. China has had to bail out its local governments to the tune of $463bln! That is a financial crisis in itself and I and the clever guys at SocGen think that this may be an issue going forward. China is fighting inflation because it has to, otherwise civil unrest over food costs will be destabilising. Further rate hikes and possible adjustments to the peg are on their way and don’t forget that China is trying to manufacture a slowdown. The world is paying more for food and raw materials and does no one think that this may affect demand and therefore global growth? Again the world needs a healthy US and a healthy EU and we have neither. I will expect to see economists start to revise their global growth forecasts soon but they are always late.

What happens if energy and food prices keep going up? Can we be sure that this won’t happen? No of course not so these markets are far too complacent in my view and are not pricing enough risk premium. I am not even convinced that a lot of higher input prices have been passed on yet so the consumer will either face higher prices or the producer will see margins collapse and neither is good for equities. Europe is in a mess and it looks increasingly likely that a restructuring WILL happen somewhere at some point, whilst Trichet seems determined to jack up rates on principle. Don’t forget that even though European politicians want to help for fear of the consequences, ultimately the outcome will be decided by backbench politicians in PM Papandreou's parliamentary party. If austerity measures are not approved by parliament on Jun 28, then all hell could break loose. And just look at the EUR; what’s it doing up here? There is little risk priced here it seems and yet the risks are huge.

Central banks are sucking volatility from these markets in a bid to create a false sense of security. This covert intervention is very clever as it’s tough to fight. Without doubt G20 is behind this and the accord is strong. They need a stable equity markets and stable FX markets to help buy time. Very clever. 

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Goldenballs's picture

In short,social collpse as workers strike to be able to afford to live while those at the top carry on being greedy bastards screwing everything.Bernanke is up shit creek and just waiting to threaten I print again or the system goes to armageddon as its already heading for but it buys more time for an insolvent superpower.

ToNYC's picture


"What happens if energy and food prices keep going up?"

If you look closely at the  open elevator shaft, the floors seem to be rising when in this case Mr. USD is going down. The denominator of entitlement doesn't leave so much stuff behind when the unearned promises are properly accounted for..and you are always being graded. When you stop dancing, the band stops playing.

Michael Victory's picture

"What happens if energy and food prices keep going up?"

The Incredible Shrinking Food Unit.

It's one way to curb obesity.

Thomas's picture

Spoke with a former deli owner who now, much to his horror, works in the deli of a grocery story. He said that rising input prices ultimately drove him out of business. Apparently, the costs cannot be passed along (yet).

augie's picture

I dont think they will be passed along until large chain stores like wallmart and costco destroy all of their own competition through price competition.

Michael Victory's picture

I have a bunch of brothers, one manages a WallyWorld.

Likely not to your suprise, they sell some items for a loss to get you in the door.


Thisson's picture

Deli sandwiches are more expensive than many of their substitutes.

Here in NYC a deli sandwich will run you ~$10.  Chinese Food is $7, Pizza is $7 (2 slices), street-vendor food is $5-$6, and hot dogs are $2-3.  Prices are approximate and don't include a drink.

Alcoholic Native American's picture

Trickle down bitches.

GetZeeGold's picture


From the US taxpayer to the coffers of Greece...according to the latest news.

Thanks Barry....supporting the lazy Greek lifestyle makes me proud to be an American.

To my fellow Americans: Get to work. We have a country to save. It's just not ours.


Cdad's picture

I'm not sure there is any faith to keep.  For Average Joe, this entire three year period has been a struggle...and it is ending with another leg down.  Everything I look at tells me that this is about to get very ugly very quickly...EXCEPT the VIX...which is obviously an instrument so manipulated that it is currently dysfunctional.  This, however, should serve all, as clearly it cannot remain here.  As such, it will signal very loudly the coming ugly.  It simply has to.

Another thing that simply has to rally is the US dollar.  While it is easy to make a macro case against its true value, considering all the printing that has gone on, it simply has to rally prior to commencing another round of easing.  It simply HAS TO.  As such, and unless all the rules have changed [and they may well have], PMs have a struggle directly ahead [priced in USDs].


Boston's picture


When the USD soars, that will be one of my signals that the Treasury rally (which continues briskly this am, thank you very much) may be nearing its end.....


THE DORK OF CORK's picture

Still other things are happening in the universe today...........

If there is anybody or something outside the earths magnetosphere they might have more pressing problems with a proton / electron stimulus.


Goldenballs's picture

Maybe Bernake is an alien and a UFO is going to appear over the Whitehouse dropping shitloads of Silver to bail out the JPMorgue.

THE DORK OF CORK's picture

Tears of the sun or tears of the moon ? - what do you need for this present earthly monetory crisis my fellow Arcturian.

anony's picture

Who cares about the sun when we have Sofia right here on earth, erupting like an atomic bomb:

alexdg's picture

So now we're all hoping for QE3? I guess Bernanke's plan did work afterall. Now that we need it, he'll pull it out from beneath us, and we'll all fall into panic, moving from stocks to bonds? Proving that US debt has plenty of buyers and that Obama can keep up a large stimulus...

Goldenballs's picture

You always have a buyer when you buy your own refuse.

Oh regional Indian's picture

Faith and hope, surely the biggest stumbling to our species innate en-velopment. Faith indeed, so that is where we are, obama sold faith and hope. 

And the UK turned the corner with 24 hour pubs. You can chart it. I knew th eday I read it. Insane.


Goldenballs's picture

Soon a traditional UK pub will be a distant memory in most of the UK.

DogSlime's picture

...and the first shall be last.

The UK is just trying to make sure it isn't the first to default.  Everyone knows we're screwed in the UK, but I am convinced that all the appeasement of the markets and ratings agencies is purely to hold out until others default before us.

Not sure if that's a good idea or a bad idea but it's the only explanation I can think of for why our government are sticking with this stupid policy.

Goldenballs's picture

A Dangerous game of Brinksmanship has been going on since 2008,the aim of the game is to make everyone else look worse than you.Nice snippet the other day about UK banks buying UK Government debt.Sooner or later the game ends when the parcel explodes and the chain reaction takes down everything not just the country left holding it who was the first to explode.Globalisation means its all interlinked,like a global sewage farm slowly building up to go off.Beware unexploded nations,no naked flames.

Curtis LeMay's picture

They need a stable equity markets and stable FX markets to help buy time. Very clever.  


I am sick and tired of pursuing near-term stability at the expense of the very future of every one around us.

That's all bin Bernanke and Turbo Timmaaay are doing...

Fuck the stock market, fuck commodity speculation and fuck the bankers.

Cut taxes for business all across the board and get America moving forward and people back to work.

Bobbyrib's picture

The Bush tax cuts were all ready extended and as many people on this site have said before how many corporations pay taxes? The answer is not deregulation and more tax cuts.

Curtis LeMay's picture

Hey Bobby,

No, sure. That's what the accounting departments are for, right?

But all they do is interpret tax law, not make it.

We are all in deep shit. Perhaps it really is time to just make a flat corporate tax rate across the board and create an environment where it would be practically prohibitive for companies to put their profits in the bank and instead graciously reward investment and R & D instead?

This is not rocket science, but a large part of the cause for the cluster fuck we are in is due directly to the fact that many folks believe it is rocket science. The powers at be need to take a step way back an re-visit everything and see where government and industry can realy prime the economic motor(s). Whatever it takes.

The shit that is going on now is pathetic. Any two year old could figure out that if +/- there's a "money problem", print more of it...

Thisson's picture

If you want more jobs, you should be happy that corporations have low tax rates.  The more it costs to do business, the less money there is for hiring employees.

Lowering taxes IS the answer, provided that we are cutting unproductive spending, unearned entitlements and reducing debt service costs to make that possible.

THE DORK OF CORK's picture

Ain't that simple Curtis - any real growth will transfer your dollars to Arabia , you need to deny these guys your dollars by taxing oil to at least European levels if not higher.

This is complicated because of the current petro dollar system but that merely benefits New York and Washington to the detriment of the rest of your country.

Curtis LeMay's picture

Hi Dorkie

I am not sufficiently briefed on petro-economics to comment, really, but it would be safe to say the we have a huge trade deficit with Arabia, just like with China? 

The world has been living off of US government largess for decades, and I have no problem with that as Americans have reaped rewards from this as well. Moreover, we have been able to easily pay for, i.e., Saudi oil. No sweat, really.

Beyond stuff like this, though, screw even the thought of QE3. Let's face it, QE1 and QE2 are blatant admonitions of failure. Pursing the tweaking of failure must stop, and stop now.

Time to free up - and I mean like never before - the genius and drive of US industry. That will pull us all out of the mire, and leave something for our kids to work for and dream about too.

Thisson's picture

There is the seen and the unseen (hat tip to Bastiat).  While relatively cheap oil may SEEM like a good thing, it is preventing us from developing other (possibly better and cleaner) alternative sources of energy.

paulbain's picture

I am puzzled. So far, no one has even mentioned, much less discussed, price controls. I think that it is obvious that, if petroleum prices continue to increase, the Federal government will come under enormous political pressure to impose price controls on gasoline and diesel fuel. Furthermore, the relative inefficacy of such controls is very predictable. There is but one way to stop a hyperinflation: stop printing money. There ain't no other way.


-- Paul D. Bain


averagejoe's picture

Money printing is simply to disguise a problem ie that the economy is tanking. Defaults and depression are the normal tools to correct the drop in net demand caused by the overaccumulation of wealth at the top.

Thisson's picture

There's no such thing as "overaccumulation of wealth" at the top. 

The problem is the market distortions that ordinarily facilitate (or result from) accumulation of wealth.

The rich getting richer is a sign of capitalism working, as people who are effective allocators of capital reap returns from productive investments.  Unfortunately, our society has been bailing out ineffective allocators of capital after they have made their malinvestments.

averagejoe's picture

And so the current and probably the biggest crises of capitalism of all time continues.  This will not end until all but the rich are impoverished and living at subsistence levels. Then a revolution will be a distinct possibility as predicted by Ravi Batra.

Re-Discovery's picture

Real time in my posts yesterday I wrote most of this.  Commodities are STILL the play here, otherwise the entire world deflates which simply can't be allowed to happen by these idiots.  I also think stocks do NOT recover with a QE3 announcement but stabilize at lower levels in a continual step down process (with each extension of QE) until we hit 5% plus annual CPI inflation at which point stocks go up but who really cares.  I think equity longs are crazy here.  I think some commods (PMs, Oil, industrial metals) are a short-term short here, but be careful.

Bernanke WANTS to print.  He will stick to his thesis which is the whole "no inflation" BS.  If he doesn't acknowledge inflation as a problem, then he can fiddle with the prrinting press until there is no question about the problem.  He is also shifting blame to Congress which says that he is setting up a 'surprise' QE.

Stay nimble.  A correction is needed to provide cover so jumping in too soon can be fatal.  Shorts need to stay ready to shift after particularly egregious pullbacks.  I still think June 22 is the operative signal date to change policy, i.e. more QE.  But it could also be July.  Not past first week in August.



augie's picture

some of the Commods.(PMs, Oil, industrial metals)


lol thats pretty much the bulk of the market ex-food.

I don't beleive there is a safe haven from the coming deflation. Everything will be effected. 

Re-Discovery's picture

SHORT term short on those commodities.  Post June/July long.  Longterm short on equities. I was pretty specific.

I would like to add that the point in the article about Central Bank intervening in the FX markets to effect equities is absolutely true and happening now with the Euro as they try to instill confidence in the Greek bailout.  This elevates equity markets based on computer programs that are FX sensitive.

When they EUR next collapses, the quants will need to reprogram their machines from the ground up to account for this government market rigging.

Use of Weapons's picture

People are meeting in Switzerland 9-12th June. So far, we've had three major (not-so-subtle) actions in this last month to keep the dance macabre going (China most recently). I'd suspect some serious moves towards a more permanent and less unstable solution to the global issues being at least mooted in Swiss meetings. (And what the hell is "Operation Romance" -- tinfoil meets Mills n Boon?!).


Europe - Greece, Portugal keep clinging on: just. Spain is crossing its fingers, and the mid/strong partners (UK etc) are playing ball to prevent getting looked at too closely.

China - just bailed itself out using its own money. Which it can do. Drought to floods, crops?

USA - Hmm. Covered enough here - however, there's pressure from other places, interestingly enough. If you want to know what 50 odd million people without food stamps turns into, you should just look over the border: . And yes, thank the IMF + GS for that social "result". Wasn't Mexico the IMF pinup?

All in all - ZH is currently an interesting case, given that a percentage of its readers (no, not you, millennial silver hoarders) are currently hollow men, playing a game that isn't following the rules they've learnt. Tyler has already shown that many of the larger fish have left the pond due to this; the rest is just anthropology, watching an extinction event.






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I'm spotting that you might have gotten cleaned out in at least 7 of those categories? Also, don't have lorem ipsum on a professional webpage?

TheGameIsRigged's picture

Liesman has his pom poms out in full force.....


The downdraft in the economy is NEVER OUR fault - it's ALWAYS the other guy!!


Sounds like most marriages I know.....and we know how THEY turn out