Monetary Policy

Is the ECB ready to admit the potential failure of the Great Global Macro Experiment? What will an increase in interest rates bring? Prepare for global cap rate expansion and the potential equivalent for the first global real estate depression...

When we talk about “solvent” Europe we’re largely talking about Germany which is currently in the process of seven state elections. If the first, in Hamburg, is anything to go by, the German people are sick of both the bailouts and the European Union and want to ditch the Euro entirely. Merkel now has a choice, stick with the Euro and commit political suicide or ditch the Euro/ demand the less solvent members leave.

If you’re like me, you’ve probably looked at the US recently and wondered what has happened to your country. I’m not talking about the GOP/ Obama situation nor am I referring to capitalism vs. socialism... I’m simply talking about basic common sense items like: stay out of debt, don’t do anything if it doesn’t make sense, do you homework before signing a contract, etc.

Investment banking as an industry runs almost completely contrary to wealth creation since it thrives on fees rather that capital appreciation. Investment banking is about making DEALS (any deals) regardless of whether the deals make sense or benefit both parties (after all, the advisors to the deals, the investment bankers, get paid based on commission and free stock).

Would it have mattered if at the beginning of the crisis in Egypt that information on his wealth outside the country were accurately reported? Maybe. I think so.

Will the bond market kill the party in stocks? It's not that simple...

Ever since the Financial system started imploding in July 2007, I’ve heard countless folks talk about liquidity, bull markets, bear markets, the dollar, bailouts, etc. But there’s one thing I’ve heard virtually NO ONE talk about. That is:MORALITY or ETHICS.

The first thing that needs to be said is that IF we have another systemic meltdown like that of Autumn 2008, Gold will likely go down along with everything else. There are simply too many big players (hedge funds, investment banks, etc) with heavy exposure to Gold who would be forced to liquidate their positions during a systemic collapse.

Dear Ben: I don’t know if you read ZH. I bet you do. It would be disappointing to learn that you didn’t read some of the leading edge financial blogs. But if not, I bet at least one of your staffers does. If you’re any kind of manager, they won’t be afraid to bring this to your attention. Or perhaps Ron Paul’s staffers can shoot a copy over to your office. It’s a simple petition, really, in the traditional sense. I hope you will consider it. I understand the conclusion you came to in 2008 and early 2009 after a career spent studying the Great Depression, and I also understand that you feel justified in using whatever channels are available to you as proxy helicopters to drop cash. And it works. You’ve essentially manipulated the US and world markets as though they were remote control funny-cars, bent to whatever short-term route you desire, though we have yet to see what the second and third-order effects are. I mean, beyond food riots, destabilization of the Middle East, gas prices that American citizens won’t ultimately be able to afford, agriculture prices that will play havoc with corporate margins and retail food prices, the US dollar losing its reserve-currency status… things like that.

Something interesting happened earlier today in the much underappreciated eurodollar market. As the Bloomberg chart below shows, just before noon, someone aggressively sold 100,000 contracts of the March 90 day Eurodollar future. Why is this notable? Because at a contract size of $1MM per, this is effectively a $100 billion notional bet that the eurodollar price will decline over the next month. What does this mean in simple terms is that since the eurodollar price is determined as the difference for par in 3 month Libor, someone just put a very sizable bet (probably one of the biggest single Euro$ blocks traded in recent months) that Libor is due for a jump. Now Libor, traditional economists will say, is a function of monetary policy and a reflection of the short-end of the curve (remember the now forgotten TED Spread?) which is driven almost exclusively by the Fed Funds rate. It is also driven by exogenous risks to the credit system such as what happened when Lehman blew up and Libor hit the stratosphere. In other words someone just put down up to $100 million in capital at risk ($82.5 million to be specific) that over the next month (contract expiration assuming no roll, is March 14, 2011) we will see one of two things: a bullish economic development: a rate hike (or expectations thereof) in the US, or to a lesser extent the ECB, or a very bearish one, such as a bank collapse, along the lines of what the recently disclosed surge in MLF borrowings may be predicting- recall what happened to Libor when Lehman fell... In other words your traditional barbell trade. Either way, should this single traded be imitated in the next week, one can bet that the Eurodollar trade will suddenly become far more popular.

Investors have dozens of reasons for loving Gold. Some love it because it’s a great inflation hedge. Others love it because it can’t be devalued. Others love it because it’s a storehouse of wealth. Personally I like Gold for all of these reasons too. But my favorite reason for liking Gold is because it calls “BS” on this stupid stock market rally.

Here in the US we prefer BS numbers to no numbers at all. The US ALWAYS reports data (unless it’s regarding someone on Wall Street or our Fed Chairman breaking the law). And if the real numbers are too ugly we use seasonal adjustments, birth/death ratios, survivor biases, and other ridiculous adjustments to make the data just palatable for publications.

Ben Bernanke has started his speech on the Fed's role under Frank-Dodd, and specifically on Bernanke's role as head regulator of everything. His prepared comments were released Tuesday evening. He did not address either the status of the economy or monetary policy. He focused on how the Fed is helping to establish the new Bureau of Consumer Financial Protection (CFPB). The speech and Q&A can be followed here.

Markets down this morning today. Yesterday saw several significant releases, with housing starts at 596K, well ahead of consensus estimates at 539K. PPI rose 0.8% MoM, in line with expectations while industrial production decreased 0.1% v 0.5%E. Fed minutes from the January 25-26 meeting expressed continued disappointment in labor market conditions. FOMC reaffirmed QE2 despite dissent, but did not comment on future actions after the purchases. Overall, the Fed was more optimistic citing an increase in household spending late in 2010. Fed Policymakers also noted that long-term inflation expectations are stable as they had at the December meeting although this month they acknowledged rising commodity prices. Today’s CPI release is expected to show weak inflation numbers with consensus estimates at +0.3% MoM.

Ever since the advent of QE2, few if any, sellside analysts employed by Too Big To Fail banks have dared to voice a negative opinion of the Chairman's third mandate, that of raising stock prices (for obvious reasons: nobody will bite the hand that feeds them trillion in taxpayer bailout money). Which is why we continue to believe the BofA credit strategist Jeffrey Rosenberg is one of the few men standing who dares to call it how it is. In his latest piece, Rosenberg lays out what is the most harshly (yet diplomatically) worded criticism of QE we have read to date. "In our view, the longer term problem with such a strategy is that in delaying the adjustment to the root causes of the credit crisis, namely excessive leverage in the economy and financial markets, the essential vulnerabilities from that excessive leverage remain. What triggers their realization again is the inflationary shock leading to an interest rate shock that undermines the cheap cost of that debt that currently enables its maintenance." As for the implicit assumption that savings and wealth are inversely correlated, Rosenberg points out the glaringly obvious: "Inflation erodes the value of those savings and decreases their standard of living." The only option left: "Lowering the value of savings creates a powerful incentive to take on investment risk to maintain the real purchasing power of those savings." And while everyone getting aboard the investment ship at the same time is a horrible idea when it happens in one country, it is a guaranteed disaster waiting to happen when it occurs at the global level. Which is precisely what has happened: "Today, we see that same pattern again at play. But this time, it’s not limited to just the US Fed policy. Globally, central banks are pursuing coincident easy money policies. And even in Emerging Markets where the inflation fears stand most acute, the policy rate increases are just keeping  up with inflation increases. The result: global negative or zero real policy rates." The entire global "economy", which really means stock market, is now one timebomb, just waiting for the first central banker error-induced 'crack' to appear in the windshield, following which the destruction will be unprecedented.