Since it is now obvious to even the back office that Jan Hatzius makes monetary policy in the US (just note the spike in QE3 anticipating factors following his weak assessment of the weak Services ISM earlier), it probably makes sense to present his response to the policy that he through his predecessor Bill Dudley, helped enact. Below is the Goldman take on the FOMC minutes. Ignore the house of mirrors effect.
We have now gotten to the very limits of the market, where any even modestly bad news (Services ISM) even if of a secondary importance nature, sends the market surging higher as expectations that QE3 is inevitable, hit 100%. Then when good news comes, and QE3 is deemed to be impossible, the market plunges. Bizarro world, where bad news is good news and vice versa, has won. Thank you central planning. And for all those who jettisoned gold on expectations the economy was actually, chuckle, improving, here is your chart.
One hour ago the PBOC announced the most recent Chinese rate hike, second in 2011, and fourth since October 2010, in the country's ongoing fight with excess-liquidity driven (both courtesy of the Fed and the PBoC itself) inflation, which has been running near a 28-month high of 5.1% hit in November. Benchmark one-year deposit rates will be lifted by 25 basis points to 3.25 percent, while one-year lending rates will be raised by 25 basis points to 6.31 percent, the People's Bank of China said in a statement on its website. The hike will be effective beginning Wednesday, April 6.
Courtesy of the Village Whisperer, we are happy to present BMO's latest comprehensive report on silver titled "A new paradigm for silver." While we suggest readers skip the part about price expectations for gold, silver and other metals, which at this point nobody save for the Chairsatan has any clue where these will go (and Bernanke's mind is made up for him by Jan Hatzius, so as always pay attention to Goldman buy/sell signals on PMs), the report does have a very extensive section on the key supply and demand drivers, which for anyone new to the metal, is a must read. Additionally, the report covers virtually all the key silver miners of note (incidentally for those wondering, the San Critsobal strike was lifted earlier today).
While it is no surprise that there is nothing in this world that can derail the optimism of Goldman's David Kostin (GS S&P 2011 target 1,500 until Jan Hatzius and his double Bill Dudley say otherwise), in his latest Weekly Kickstart he does provide a useful visual analysis of what happens in a period of rising interest rate cycles. Of course, this is only to create the illusion that rates are indeed set to rise: as we indicated said illusion was roughly two times stronger this time last year when the market once again didn't remember what a downtick looked like, and yet it all turned out to be a function of QE1, which upon ending on March 31 caused a correction, and QE2 a few months later. We wonder how many professional investors actually are naive enough to equate constant pumping of billions of dollars into the market by the Fed with economic improvement. But while we will get our answer in the next several weeks, here are the key signs to look for in the latter part of the interest rate cycle.
Goldman's Jan Hatzius, who whether he likes it or not, is probably the biggest variable as to whether there will be a QE3 or not, as every other Wall Street "strategist" immediately parrots what Hatzius says will happen (in no small part due to Hatzius' close relationship with NY Fed's Bill Dudley) has just released a hypothetical Q&A session in which he provides what potential answers to questions during Bernanke's first ever scheduled press conference on April 26 of this year might look like. In order to keep the dodecatuple reverse psychology mystery to a maximum, Hatzius also provides what Goldman's answers would look like pari passu with those of the Fed (which is not all than ironic: after all the Fed gets its teleprompted lines straight from the corner offices at 200 West). So for all forensic linguist/economist/psychologists who are hoping to get an extra ounce of informational clarity on the future of monetization post June 30, here it is. Good luck.
All those hoping (here's looking at you Mo) to see a prompt bounce back in Japan to baseline economic levels may be in for some disappointment. Reuters reports that according to various sellside analysts, the impact to Japanese GDP (which is virtually tied with China for the world's second largest economy), could be anywhere between 3 and 5%. "Quake-hit Japan faces a recovery and reconstruction bill of at least $180 billion, or 3 percent of its annual economic output and more than 50 percent higher than the total cost of 1995's earthquake in Kobe. The Kobe earthquake is estimated to have cost $115-118 billion, or 2 percent of GDP in 1995 terms. This time -- in a still unfolding disaster -- initial estimates from Credit Suisse and Barclays put the cost at $180 billion. Mitsubishi UFJ Securities and Sarasin expect the cost could run as high as 5 percent of GDP. Mitsubishi's estimates take into account a wider economic cost including a loss of tax revenues, subsidies to various industries of the affected area, loss of productivity following rolling blackouts on top of straight reconstruction costs." And it could be far, far worse: "some extreme projections of the longer-term cost look at figures closer to $1 trillion over several years." And as we first quantified over the weekend, the reinsurance caps for real estate losses are maxed out at about $60 billion. Which means either the government will leave those with insurance policies to split pro rate proceeds that refunds amounts owed at a big haircut, or in tried US fashion, will have to step in with emergency transfer funding measures, capitalized through the issuance of tens if not hundreds of billions of new debt. As for who will buy that debt, we look forward to Bill Gross' next letter for clues thereto. In the meantime, look for global GDP to be cut by at least 1-2% by the sellside pundits "shortly" especially as the way for QE3 is paved by the likes of Jan Hatzius who is lucky to have a force majeure on his second "Golden Age" call.
Earlier today, Goldman New York Fed plant, and Jan Hatzius predecessor, Bill Dudley, emerged from his ivory tower to make a trek to Queens to deliver prepared remarks written by some intern, discussing the prospering state of the New York burrough (speech link). Unfortunately for the multi-millionaire, things quickly went from Unicorny and Rainbowy to horribly wrong. During the Q&A, one audience member asked: "When was the last time, sir, that you went grocery shopping?" A stunned Dudley did not have the heart to elaborate that the caviar and ambrosia eaten on the Dudley family table is hand delivered through the Fed's G-6 from Kamchatka, so instead, as Reuters reports, he "tried to explain how the Fed sees things: Yes, food prices may be rising, but at the same time, other prices are declining. The Fed looks at core inflation, which strips out volatile food and energy costs, to get a better sense of where inflation may actually be heading." At which point he proffered his sage advice to the increasingly restless natives: "Let them eat iPad."
After an attempt by the BTFD brigade to restore balance to the central planning force just after mid day was thwarted by developments out of Saudi Arabia, the upward bias gave up the ghost and correlation trading took over, with complete flight to safety overtaking all novel factors, and the market closed below key technical support levels, including both the 50 and 55 DMA. In fact the market closed below the 55 DMA for the first time since September 1, 2010. The stunningly resilient Euro also plunged, as all capital flew to the 10 Year. The last time we had an open to close move as large as today's was August 11 2010, when the market was spooked by the then downgrade of the economy by Jan Hatzius. As a reminder, the only thing that saved the market in August, and why stocks took off and never looked back at the end of August, was because the Fed announced QE Lite in mid August, and then leaked QE 2. What will have it this time, nobody knows.
That didn't take long: From Goldman's Hatzius "News Reinforces Our Sense Of Downside Risk To Q1 Growth." Ah, the propaganda bureau's primary dealers: predictable as a Swiss watch. How long before RenTec's headline parsers read between the lines and realize that QE3 will launch at the latest by September. Of course, there are a few European near-defaults and passed stress tests in the interim, so the dollar may well jump for a month or two, only to plunge to fresh(er) all time lows once more QE is announced (just prior to which Gross will start buying bonds).
More Conflicting Disinformation: Fed's Fisher Says May Vote To End QE2 Before June, As Lockhart Says QE3 May Be NeededSubmitted by Tyler Durden on 03/07/2011 10:23 -0400
More purposeful confusion out of the Fed this morning after Fed's Fisher just hit the tape saying he may vote to end QE2 before the June deadline, even as Lockhart says QE3 is possible if the US faces another downturn. The purpose of all this constant conflicting disinformation is to keep market participants on edge as the marginal economic improvement is finally starting to reverse as Goldman's Jan Hatzius insinuated last night. In other words, should the Libyan conflict not be resolved for another few weeks, QE3 is pretty much guaranteed.
Brent Over $118, Crude Passes $107, EURUSD Above $1.40, Futures Up, Silver And Gold At Highs, Dollar In Flight To Safety FreefallSubmitted by Tyler Durden on 03/07/2011 08:18 -0400
It is one of those days when the flight to new reserve currency is on, with gold and silver trading near overnight highs, same for the oil complex, yet futures are also at the highs of the premarket session, purely on the ongoing monkeyhammering in the dollar, which has now completely given up the ghost as the reserve currency on yet another bout of QE3 concerns, following last night's very cautious note from Jan Hatzius. At last check the DXY was at 76.135 and plunging. As for why oil will continue whacking bits and pieces of Q1 GDP, and why Goldman will have no choice but to push for another round of dollar rape, here is Reuters with the skinny: "Brent crude rose to $118 a barrel and U.S. oil hit the highest since September 2008 on Monday as fighting in Libya disrupted its supplies and renewed concern of wider disruptions in the Middle East. While the Libyan crisis has cut supply from a country that normally provides almost 2 percent of world output, the prospect of unrest spreading to larger producers such as Saudi Arabia is a far more bullish scenario for oil markets. "The major risk remains the prospect of the political unrest spreading to the Gulf producing region," said Caroline Bain, economist at the Economist Intelligence Unit. "However, even if there is civil unrest in Saudi Arabia, it is not a given that oil production will be affected." Wrong: it is a given.
One of our key predictions from early this year has been that Goldman Sachs' formerly crack economic team (and now considered by some to be nothing but a propaganda team on crack) will in the coming weeks and months materially downward revise its dramatic economic upgrade from early December (just coincidentally coinciding with the minute the Fed released previously secret bank bailout records), which ended the firm's skeptical stance on the US economy, and launched it into all out Kool-Aid mode on nothing but one-time adjustments courtesy of a last gasp attempt at fiscal stimulus. While we are still scratching our heads why Hatzius would totally discredit himself by doing nothing more than what momentum traders do at an inflection point, and calling for a paradigm shift in his outlook when the most recent bout of gains is not driven by any recurring fundamental improvements, frankly we don't care. What we do know is when Goldman turns outright bearish again, some time in late March, early April, it will be time to buy QE3 with both hands, following a dinner or two between Hatzius and Bill Dudley at the Pound and Pence. Tonight, Hatzius issued his first and very vague intro to the coming mea culpa: "The increase in oil prices is emerging as a more meaningful downside risk to growth later in the year. At this point, we emphasize that this is just a risk, not a change in the forecast, as our commodity strategists expect part of the near-term price increase to reverse if the situation in the Middle East stabilizes. But we are now clearly moving into riskier territory" and "eventually, fiscal policy will need to tighten anyway because the current structural deficit is much too large to be sustained over the longer term. But if this tightening occurs more quickly than expected, that would likely weigh on near-term growth and, in turn, reduce the likelihood of tighter monetary policy." We are certain that today's note is the first whisper to those who read between the lines on what is coming from Goldman as soon as a few weeks from today, perfectly in line with Zero Hedge expectations. To be certain, it wouldn't be a Goldman report without the now traditional comic interlude: "Going forward, we expect employment to continue growing at a healthy clip, but participation is likely to flatten out and may rebound a bit, as word about the improvement in labor demand gets around more widely." Come again? Goldman is blaming the lack of propaganda media penetration for what will be a rise in unemployment? Frontal lobe hemorrhage to commence in T minus 5...4...3...
During his presentation to the Senate yesterday (to be followed promptly by another presentation before Congress shortly), Bernanke discussed the impact of the $61 billion spending cut on GDP. In doing so he referenced a report published by Goldman strategists Jan Hatzius and Alec Phillips. He did so incorrectly. And the first thing Hatzius did this morning is to correct the Chairman: "Some have wondered—e.g. in the Q&A portion of Fed Chairman Bernanke’s monetary policy testimony on Tuesday—how such seemingly small cuts could have such a noticeable impact. But it is important to remember that we are talking about a hit to the quarter-on-quarter annualized growth rate of spending here, not about a hit to the level of GDP. For illustration, it is useful to go through a simplified version of the calculation underlying our estimates for the House-passed spending cut." Hatzius clarifies further: "We estimate that the $25bn cut in our budget projections reduces growth in Q2 by around 1 percentage point (annualized); this effect is already incorporated in our forecast that real GDP will grow 4% (annualized). In addition, we estimated that the $61bn cut passed by the House would reduce growth in Q2 and Q3 by 1½-2 percentage point (annualized) in Q2 and Q3. (In other words, relative to the assumptions currently embedded in our forecast, the House-passed package would imply an additional ½-1 percentage point drag on growth in Q2 and an additional 1½-2 percentage point drag in Q3.) Spending would then be maintained at that lower level thereafter, and the effect on GDP growth would dissipate quickly in Q4 and would be essentially neutral by 2012 Q1." So perhaps the Chairman will keep this in mind as this report is surely reference once again today.
Albert Edwards On The Resurgence Of The "Conspiracy Of Optimism" As Groupthink Is Back To Record LevelsSubmitted by Tyler Durden on 02/26/2011 15:01 -0400
As regular readers know too well, one topic Zero Hedge enjoys ridiculing with the disdain it deserves is groupthink of any form. The phenomenon, which is nothing but transference of laziness by those who manage other people's money with complete disregard for the consequences of their actions, was among the main reasons for the Great Financial Crash. As nobody was willing to engage in any form of critical thought, and with the market "only" going up, any investment thesis was predicated solely on what the "other guy" was doing. Of course when it all blew up, it was time to blame the evil rating agencies. After all, heaven forbid someone actually think about the logic behind the credit ratings of hundreds of billions in synthetic CDOs, or worse still, take responsibility for their own stupidity and laziness. We are now precisely in the same place we were when the market peaked last time around, with groupthink rampant, with any attempt at opposing thought squashed for fears it will end the party early, with sellside analyst optimism at all time highs, and with the administration actively encouraging rampant lies and perpetuation of the myths that take hold in the market with no factual footing whatsoever. The "conspiracy of optimism", as dubbed once by James Montier, has once again fully taken hold. As SocGen's Albert Edwards points out "despite another post mortem on forecasting failure, nothing has or will change": this is true... until the next crash. Then the finger pointing will begin anew, theatrics about the change in the Status Quo will resume, and once again the Fed will attempt to reflate the latest bubble crash. Only this time there will be no reflation, as the central planning committee's reign of terror will be over, and the fiat monetary system will have ended. Below we present Edwards' most recent solemn and very troubling thoughts on the latest break out of the great groputhink malaise, which will only last as long as the great chairsatan has some control over events. Luckily, with the amplitude from a stable market equilibrium shifting ever greater in either direction, and as the Fed's very existence (remember: the whole point of the central bank is to contain price stability) is repudiated, the time until the reset is now shorter than ever before in history.