Of course freedom - as envisioned by the Founding Fathers - and free markets would go a long way towards allowing normal volatility, and thus preventing Black Swan collapses ... but the Chairistan and Thought Police can't have that, now can they?
A fascinating insight from Graham Giller of Giller Investments, who analyzes over 55 years of Treasury data to point to what is the crux of the problems of monetary policy since Greenspan took over the Fed. The Greenspan [and Bernanke] era monetary policy has altered the distribution of changes in interest rates in a way that exchanges a reduction in day-to-day 'normal' variability for a considerably higher (perhaps catastrophically higher as we are finding out this week) likelihood of extreme shocks.
- between six and 30 years), net interest margins in the banking sector will likely be negatively affected.
- The dramatic decline in the 30-year bond yield is going to aggravate already-massively actuarially underfunded positions in pension funds
- The Fed says it is going to extend this Operation Twist program through to June 2012. This is a subtle hint to the markets that barring something really big occurring, there is no QE3 coming — not over the near term, in any event, and certainly not at the next meeting on November 1-2. So a stock market that has continuously been fuelled on hopes doesn't have any in this regard for at least the next month and a half.
The (very appropriately named for today) Mike Krieger submits the latest piece, this one on a topic much discussed recently on Zero Hedge: the full blown escalation in financial warfare. To wit: "You have to hand it to these guys. The move was a stroke of central planning genius. Not only did they destroy people with major long Franc positions versus virtually any other currency (the Franc went down 25% versus the dollar in a one month period and 20% versus the euro) which was a way for the central planners to extract a pound of flesh from those betting against them, but it also was just as much if not more so directed at the gold market. Let me explain. Anyone with a large long franc position also likely has a long gold position as they are (rather were) essentially the same macro bet. Such a massive move in a currency such as the franc would have been so unexpected and such an outlier event that it would have wrecked severe havoc on many portfolios. The central planners knew this and they used it to their advantage to stop gold in its tracks as it was headed to $2,000/oz and beyond. This was no coincidence. It was financial warfare. You MUST know your enemy to survive and win the war because the central planners can win battles but not the war."
The big news yesterday was not of the twist type, but of another dance number (or slumber) between Bernanke and Obama.
The Fed announced Operation Twist today. Goldman got it right.
GATA's Chris Powell speaks: "The speaker following me, George Clooney, will be able to tell you what it's like to be handsome, talented, rich, and famous. I could tell you what it's like not to be. But instead the conference has asked me to talk about gold, which at least might make you rich, or help you preserve some of whatever you've got. This opportunity is full of risk, because the gold market long has been manipulated by Western central banks to restrain the gold price. The Western central banks are slowly losing control of the market but they are not giving up easily. Why do Western central banks manipulate the gold market? The gold market is manipulated because, despite Federal Reserve Chairman Ben Bernanke's insistence to Congress a few weeks ago that gold is not money, just "tradition," gold is indeed a currency that competes brutally with government-issued currencies and helps determine not only the value of those currencies but also interest rates and the value of government bonds...."
I direct your attention to the pace and direction of stimulus additions at the time to look at the “macro” forest from the “extrapolated trees” to see the outcome of a policy departure was more beneficial to bond market valuations as The Chairman was illustrating sound monetary prescriptions, ones that preserve streams of cash flows instead of diluting them, perceived exitings of easings. So, with a morning rant in a pre-Fed proclamation (which wasn’t planned), I can’t help to think that if the telegraphed notion of a twist or a reduction of interest on reserves were to occur today that this could be viewed as a mere TECHNICAL operation but possibly the order of the day is that, this policy is aligned in the wrong column to protect the integrity of purchasing power of bond investors. A mis-alignment. World off opposites. Easings are bad, retrenchments are good. Twisted.
As we reported, last night a quartet of GOPers (re)sent a letter to Bernanke demanding no more QE. To be sure this was not the first such letter, and followed a nearly identical missive sent back in November of 2010. And while the ultimate purpose of this letter is unclear, and is unlikely to prevent the Fed from doing the only thing it believes it should do: i.e., spark the economy by reflating asset values, aka printing or duration extending - or the only things it knows how to do, did the republicans just shoot themelves in the foot and allign the dissenters against growing opposition to a full blown LSAP episode? Here is JP Morgan's Michael Feroli explaining why this may be the case.
In an effort to enable every insolvent, illiquid, and in-default institution in Europe to gain access to the seemingly bottomless pit of Trichet's despair, the ECB just dropped a series of eligibility requirements on collateral needs. Somewhat interestingly they dropped the requirement that the collateral be 'traded on a regulated market' - does that mean they will accept defaulted GGBs?
The chairman of the "Friends of the Fermentation" committee dives into the two topics preoccupying the world: Bernanke and Greece, and as usual, deconstructs both with his laser-focused pragmatic perspective. That both of these are closed loops that only get worse as they "get better" is becoming increasingly clear to everyone even remotely interested in events away from the top 20 items in Google Trends.
Nine months after the very same quartet of republicans, headed by John Boehner, sent a letter to Bernanke protesting the launch of QE2, this time the GOP has waited until a mere 24 hours before the actual announcement with an identical, if preemptive, message, namely: don't print, or stated differently, "we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people." And while the political undertone of the letter is all too obvious: i.e. prevent any additional Obama-benefiting stimulus in the economy through the only conduit Obama has left, courtesy of Fiscal stimulus being snarled for good due to the republican majority in the House, Boehner et al bring up a valid point, which is that the Fed policy now accentuates market uncertainty and promotes trade wars: precisely the topics discussed in an earlier article today. As stated by Boehner: "Our long-term growth depends on restoring confidence and certainty in our fiscal, regulatory, and trade policies -- and not on government’s willingness to engage in additional stimulative measures. When asset prices increase due to anticipated Federal Reserve policy rather than economic fundamentals, it increases the potential for speculative action and erodes confidence in the economic outlook, making it more difficult to generate sustainable growth." Regardless of its actual merit, one thing is without doubt: QE3, and the Fed, just become once again critically politicized, and as such, even more market uncertainty is imminent. All that said, the theatrical optics of this action are quite glaring.
Uncertainty. That has become the key word of the day, the month, and of 2011 in general. And while broad uncertainty has manifested itself most notably in the capital markets, it has a far more practical representation in labor markets, where the main reason why employers are not hiring more people, arguably the primary scourge of the Obama administration's record low approval rating, is due to corporate uncertainty about the future: about taxes, about government demanding its pound of flesh when the time comes, and about the economy in general. Ironically, as PIMCO speculates in its daily note authored by Tony Crescenzi, probably the primary driver of global uncertainty is the increasingly uncoordinated response by monetary policy authorities (read Central Banks) in which where before all had cooperated in the global game theory, now increasingly it is every printer for himself, as the default response turns to one of defection. And as everyone who has studied Game Theory knows, it is only the first defection that provides the biggest return, with each subsequent act generating far less benefits to the uncooperative actor, forcing even more uncooperative irrationality, and so on in a toxic spiral until outright belligerent action develops. For now said belligerence has begun to manifest itself in plain vanilla trade wars, such as that pointed out last night with the Chinese response to Europe's lack of response to its "bailout" overtures, and following up with the just announced complaint filed by the US against China on chicken prices. Naturally this is just the beginning. The real concern is that where trade wars end (which in turn begin when FX wars end), real ones start. When a year ago we first branded the Chairsatan as "genocidal" we were mostly joking. Perhaps it is time to reevaluate our definition, as it is far less comical under the current environment. Here is what Pimco has to say on the issue.
All of the symbols employed by Hemingway add to premise that life is an endless struggle with illusory rewards. In order to achieve nobility in life, a person must exhibit bravery, poise, courage, patience, optimism, and intelligence during the struggle. Then, even if the prize is lost, the person has won the battle, proving himself capable of retaining grace under pressure, the ultimate test of mankind. Ron Paul’s life is a shining example of grace under pressure. He has single handedly battled his great fish (Big Government, Big Finance, Big Military) for four decades with no helpers and many detractors. His journey is nearing its end. But it isn’t how it ends that matters. The journey is what separates the noble lion (Ron Paul) from the hyenas (corrupt politicians) and jackals (media). Ron’s message will not die. His son will carry the torch. The young people who have been inspired by his words and example will carry the torch. All of our lives will end the same way. The lesson to be learned from Ron Paul is how we should live our lives. The ideologically myopic pundits that pass for the intelligentsia in the mainstream media scornfully declare that Ron Paul has no chance of winning, when all critical thinking citizens recognize that he has already won. They can destroy him, but he will not be defeated.
The Eurozone crisis will remain on top of the agenda with a Monday conference call scheduled between the Greek Finance minister and the Troika to assess if the conditions have been met for the disbursement of the next tranche. Also on Monday, Chancellor Merkel will face the press after weak regional election results in Berlin. Likely, the Eurozone crisis will be on the agenda. The developments in Greece will remain important throughout the week, with speeches by German Finance Minister Schaeuble and the ECB's Mr. Stark potentially important at the end of the week, during the IMF/Worldbank/G20 meetings, which start at the end of the week. At the Washington gathering we expect plenty of public comments on the Eurozone crisis by global policymakers, giving the currency market an opportunity to move on every headline. The other main event this week is the FOMC meeting, where Goldman expects “Operation Twist”. Some investors have started to wonder if there will be a QE3 surprise with additional asset purchases.