As was first disclosed by Zero Hedge, PIMCO trimmed its Treasury holdings in February to zero. While many speculated that the reason is concern for global inflation, we now have the confirmation courtesy of a rhetorical Q&A with Saumil Parikh released by the Newport asset management giant. In a nutshell: "Setting aside immediate oil shocks, we believe global inflation has cyclically troughed and we see a secular upswing in inflation, which naturally will put upward pressure on interest rates. We see three key global factors as potentially adding to inflation over a long horizon: (i) The degradation of sovereign balance sheets and the structural inflexibility of fiscal deficits. (ii) Emerging markets used to export disinflation to the developed world, but over the secular horizon we see them as exporting inflation. (iii) As populations age, they tend to save less and consume more. Demographics may thus become an inflationary force globally, though possibly this risk will be balanced somewhat by demographics in emerging nations. In the near term, we anticipate most, though not all, global central banks are likely to err on the side of allowing inflation to rise above stated or implied targets during 2011. In the U.S., if the economic recovery sputters, the Fed could expand quantitative easing. But further deficit accommodation would pose inflation risks. Obviously nothing new here, and just a confirmation that in order to preserve the Wealth Effect, Bernanke will be forced to put the global Genocide (And Printing)Effect into overdrive.
Another quiet day on the scheduled news front with just new home sales on the docket and a speech by Bernanke.
By two hours...
My take on a big story today.
Here's a simple test of whether the economic recovery is self-sustaining or not: cut Federal spending back to 2007 levels (a $1 trillion reduction) and cancel all Fed intervention such as quantitative easing. If the economy is self-sustaining, it will move forward without Federal spending and Fed intervention. If "self-sustaining" is a fiction, an illusion, a mere figment of propaganda deployed to enable the Status Quo to feast off the remaining productive elements of the U.S. economy, then the economy will absolutely crater.
The linear thinkers that dominate the mainstream media and the halls of power in Washington D.C. are assessing the series of disasters in Japan without connecting the dots of history. Their ideological desire to convince people that things will go back to normal in short order flies in the face of the facts. It makes me wonder whether these supposed thought leaders lack true intelligence or whether their ideological biases convince them to lie. At the end of the day it comes down to wealth, power and control. If those in power were to tell the truth about the true consequences of demographics, debt, disasters, and devaluation, their subjects would revolt and toss them out. Before the multiple disasters struck Japan last week, the sun was already setting on this empire. The recent tragic events will accelerate that descent.
The “RISK OFF” trade could deliver a huge flight to safety for Treasury bonds. Is shorting short dated bond puts the best play?
It's another day, which means the probability of a Mohamed El-Erian op-ed is 99%. However, while in the past we may have ridiculed these now almost daily missives which lead many an LP to wonder just which media double of the real El-Erian is managing Pimco's $1.4 trillion in AUM, this one is actually worth reading as it ties in the recent developments out of Japan, with the firm's previous insistence that there will be no QE3. Oddly, this party line still has not changed: "Some will undoubtedly call either for a QE3 or for the extension of QE2. Others will warn against this type of “active inertia” in policymaking, noting that the repeated use of such an instrument will likely shift further the balance of outcomes away from “benefits” and towards what Chairman Bernanke, in his Augst 2011 Jackson Hole speech, correctly labeled as “costs and risks”. And remember, these costs and risks – or what at PIMCO we have analysed as collateral damage and unintended consequences – have consequential economic, financial, and political elements that play out both domestically and abroad. Taking all this into account, our inclination is that the hurdle rate for introducing a QE3 will prove to be very high, and rightly so."
The United States Department of Justice delivered a very clear and unfortunate message on Friday: “Attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism. While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country.” These remarks were released by the US Attorney’s office in the western district of North Carolina following the conviction of one Bernard von NotHaus, the creator of the ill-fated Liberty Dollar. Somehow, though, I doubt that Homeland Security chief Janet Napolitano or Attorney General Eric Holder will end up labeling Mr. Bernanke as a domestic terrorist.
Speaking of inflation – let’s consider this chart (from Doug Short) and what complete and utter bullshit the CPI is! Very simply, without looking at anything else – it’s housing. Housing is 42% of the CPI and declining housing costs have masked rising inflation for 5 years now.
Here are some excerpts from an interview forwarded to me by Mr. Lars Schall of chaostheoren.de with oil expert F. William Engdahl. Whether you agree or disagree with Mr. Engdahl’s theories, his insight always presents perspectives given almost zero coverage by the mainstream media. Much of the fraudulent and deceptive practices of big global banks that Mr. Engdahl discusses regarding the oil markets can be extended to other commodity markets such as gold and silver.
Each time we begin to approach the end of an announced QE period, the nervous jitters of financial markets start to set in. Will Bernanke continue with QE(n+1) or won’t he? Now it’s true that professional traders live and die by their ability to front run rumor and perception, but for long term investors who fret over such decisions, it demonstrates a fundamental lack of understanding of what QE really is. To put it succinctly, QE is an economic deal with the Devil. Once it is begun in earnest there can be no turning back. It must be played to its ultimate conclusion.
An interesting thing happened last week, garnering no coverage in the face of a global meltdown, literally and figuratively. Nike reported horrible earnings. A rare miss by the industry all star is best summed up by CEO, Mark Parker ”higher costs for materials, labor and freight are here, as predicted.” Then there was Fedex with another miss “earnings could be trimmed by ongoing Middle East turmoil and fuel costs.”... These are not isolated warnings but rather across all industries. Month after month PPI and CPI have been showing rising inputs costs, margin compression, rising non discretionary prices and contracting discretionary prices. At what point will corporate profits peak? It is quite possible that time is upon us.
In his latest Market Outlook, CLSA's Russell Napier, who has long been one of the better big picture strategists, comes to the same conclusion as we did when we penned from last Friday "$440 Billion Drop In Shadow And Conventional Banking System Liabilities In Q4 Gives Bernanke Carte Blanche For QE3" namely that the contraction in broad money aggregates (shadow banking in Zero Hedge's case, M3 in the case of Napier), opens the door wide for Bernanke to usher QE3. "recent data imply that the US reflation is in trouble. QEII has boosted reserves but banks continue to reduce credit, while broad money has contracted. There is material downside risk to equity valuations." In other words - "Sell equities as the market wonders whether there will be a QE3 and in what shape it will come. Napier's conclusion - "Whether equities will fall further depends on how flexible and successful the Fed’s next monetary package will be. Given the risk, investors are better off watching from the sidelines." This should not come as a surprise to Zero Hedge readers: we have been claiming since January that the market is due for a major correction in the end of March, early April in time to set the stage for the political wrangling that will inevitably accompany more monetary injections. That recent geopolitical events have forced some to coin the term "Glow in the Dark Swan" only makes the Fed's job that much easier...
Black Swan Clusterflock +1. As if earthquakes, tsunamis, nuclear meltdowns and war was not enough, the Examiner now discloses that a replay of the BP oil spill could be in the making, sending WTI to the (super)moon, the economy collapsing, and Ben Bernanke starting the printer in advance of QE 666. To wit: "The U.S. Coast Guard is currently investigating reports of a potentially
massive oil sheen about 20 miles away from the site of the Deepwater
Horizon oil rig explosion last April." There are no definitive reports yet, but we should now for sure within hours, if the Keppel FELS built TLP is indeed the culprit: "According to Paul Barnard, operations controller for the USCG in
Louisiana, a helicopter crew has been dispatched to the site of the
Matterhorn SeaStar oil rig, owned by W&T Offshore, Inc." And if preliminary reports are correct, BP will have been the appetizer: "Multiple reports have come in of a sheen nearly 100 miles long and 10 miles wide originating near the site." If confirmed, Obama can kiss tomorrow's Rio golf outing goodbye.