Quantitative Easing

There is noise and fluff and soap bubbles floating in the wind but don’t be distracted. Like so many things connected to the European Union it is just hype. In the first place do you think that any nation in Europe is actually going to put up money for the firewall no matter what size that they claim it will be? Let me give you the answer; it is “NO.” The firewall is just one more contingent liability that is not counted for any country’s financials, one more public statement of guarantee that everyone on the Continent hopes and prays will never be taken too seriously and certainly never used. Any rational person knows that some promise to pay in the future will not solve anything and it certainly won’t create some kind of magic ring fence around any nation. Think it through; what will it do to stop Spain or Italy from knocking at the door of the Continental Bank if they get in trouble and the answer is clearly nothing, not one thing. The firewall is just a distraction to lull all of you back to sleep and all of the headlines and discussion about it makes zero difference to any outcome and so is nothing more than a ruse. “Look this way please, do not look that way, pay no attention to the man behind the curtain, put up your money to buy our sovereign debt like a good boy and everything will be just fine.”

All you need to read and some more.

The Fed is clearly worried about the economy. Ben Bernanke's latest speeches aren't exactly inspiring. It is as if he thinks the rosy(ier) numbers are some prank being played upon him by the gods; that soon this will all be taken away. He is right. He admits he doesn't understand why the economy is the way it is. Reality doesn't fit his theory. ("It's supposed to work, dammit!") So, what do you do when you are the head of the world's biggest printing press, and don't know what else to do? Why QE3 of course.

All you need to read and more.

Firstly, Britain’s ‘safe-haven status’ is a fallacy. It is no more safe than many of the other major economies who are choking on debts that cannot be paid off. The only reason it HAS that status currently is because of the very Achilles Heel that will ultimately prove to be its demise - the ability to print its own currency. By NOT being a part of the euro experiment, Britain has kept control of its fate and has been able to print its way out of trouble - so far - while its neighbours to the east have all been lashed to the deck of the same sinking boat, but the day is coming when Britain’s profligacy will become important again. As I keep saying; none of this matters to anyone until it matters to everyone. Secondly, interest rates may have ‘fallen to a record low’ but they have done so in the same way heavily-indebted gamblers often ‘fall’ from hotel rooms - with a big push (only this time from the Bank of England and not a guy called Fat Tony). Like US Treasurys,  the price of UK gilts would be nowhere near these levels without a captive and very friendly buyer in the shape of the central bank.

Oil as a commodity has always been a highly valuable early warning indicator of economic instability.  Every conceivable element of our financial system depends on the price of energy, from fabrication, to production, to shipping, to the consumer’s very ability to travel and make purchases.  High energy prices derail healthy economies and completely decimate systems already on the verge of collapse.  Oil affects everything. This is why oil markets also tend to be the most misrepresented in the mainstream financial media.  With so much at stake over the price of petroleum, and the cost steadily climbing over the past year returning to disastrous levels last seen in 2008, the American public will soon be looking for someone to blame, and you can bet the MSM will do its utmost to ensure that blame is focused in the wrong direction.  While there are, indeed, multiple reasons for the current high costs of oil, the primary culprits are obscured by considerable disinformation…   The most prominent but false conclusions on the expanding value of oil are centered on assertions that supply is decreasing dramatically, while demand is increasing dramatically.  Neither of these claims is true…

Fed chairman Ben Bernanke is covered in a long profile by Roger Lowenstein in the Atlantic. The sympathetic account takes the reader blow-by-blow through the criticism that he has received from virtually all quarters during his tenure as Fed chair. What Lowenstein hones in on are the reviews and criticisms of Bernanke’s performance in “resurrecting the economy” — the interest rate policy, his interpretation of the dual mandate, quantitative easing, Operation Twist, etc. But for a piece that clocks in at 8,287 words, Lowenstein pays scant attention to the emergency actions taken to save the financial system itself.

All you need to read.

The concept of government power is a strange and complex cipher.  The existence of governments has always been predicated on assumptions of necessity, but few societies have ever truly considered what those necessities might be.  What is government actually good for?  What do they do that is so important?  And, what happens when a government fails in the roles and duties that a culture deems vital?  We tend to view government as an inevitability of life, but the fact is, government is NOT a force of nature, it is a creation of man, and it can be dismantled by men just as easily as it can be established. In America, many people see government as an extension of the Republic, or even the source, and an animal that feeds at the behest of the common citizen.  An often heard argument against the idea of drastic change or even rebellion within the establishment system is the assertion that the government “is us”.  That it is made of Americans, by Americans, and for Americans.  That there is no separation between the public, and the base of power.  This is, of course, a childish and fantastical delusion drawn from a complete lack of understanding as to how our system really operates today.  How many people out there who make this argument really believe at their very core that they have any legitimate influence over the actions of the state?  I wager not many…    At bottom, to cling to the lie that the government as it stands is a construct of the people is an act of pure denial designed to help the lost masses cope with underlying feelings of utter powerlessness.  

As recent entrants in the gold market watched paralyzed in fear as gold tumbled by over $100 on the last FOMC day, on the idiotic notion that Ben Bernanke will no longer ease (oh we will, only after Iran is glassified, and not before Obama is confident he has the election down pat), resulting in pervasive sell stop orders getting hit, others were buying. Which others? The same ones whose only response to a downtick in the market is to proceed with more CTRL+P: the central banks. FT reports that the recent drop in gold has triggered large purchases of bullion by central banks in recent weeks. "The buying activity highlights the trend among central banks in emerging economies to buy gold, even as some western investors are losing patience with the metal. Gold prices have dropped 13.8 per cent from a nominal record high of $1,920 a troy ounce reached in September, and on Friday were trading at $1,655.60." Well, as we said a few days ago, "In conclusion we wish to say - thank you Chairman for the firesale in physical precious metals. We, and certainly China, thank you from the bottom of our hearts." Once again, we were more or less correct. And since past is prologue, we now expect any day to see a headline from the PBOC informing the world that the bank has quietly added a few hundred tons of the yellow metal since the last such public announcement in 2009: a catalyst which will quickly send it over recent record highs.

Gold traded lower on Friday, moving towards a third straight week of losses on the backdrop of a recovering US economy, which prompted investors to put their money in other vehicles, while India’s plan to double the import duty on gold bullion erased some early gains. On news that Finance Minister Pranab Mukherjee proposed to double the 4% customs duty on gold from April 2012, physical dealers saw some panic buying from India, the world’s largest gold consumer. In January, India raised the gold import duty 90% and doubled the tax on silver as the government is struggling with a growing fiscal deficit and looked to increase revenues. Growing subsidies for fuel and food have left the government struggling to meet its budget target.  Indian investors, who are the largest consumer group of gold in the world, rushed to buy gold in advance of the government’s plan to increase the 4% customs tax in April 2012. The resulting gains where then eroded by stronger then expected US economic growth numbers.  

All you need to read.

• Tapping oil from the SPR may be trickier than ever (Reuters)
• Why Quantitative Easing Is The Only Game in Town: Martin Wolf (FT)
• Lacker Says Fed May Need to Raise Target Interest Rate in 2013 (Bloomberg)
• Japan Debt-Financing Concern Clouds BOJ’s Bond Buying (Bloomberg) No worries - US will just buy Japan's bonds
• IMF Approves €28bn Loan to Greece (FT)
• Banks Want Fed to Iron Out 'Maiden' (WSJ)
• China 'Wealth Exodus' Underestimated (China Daily)
• Geithner Calls For Reforms to Boost Growth (FT)
• China Adds Treasuries For First Time Since July on Europe Woes (Bloomberg)
• Osborne Weighs 50p Tax Rate Cut To 45p (FT)

Confused why every asset class is up again today (yes, even gold), despite the pundit interpretation by the media of the FOMC statement that the Fed has halted more easing? Simple - as we said yesterday, there is $3.6 trillion more in QE coming. But while we are too humble to take credit for moving something as idiotic as the market, the fact that just today, none other than Goldman Sachs' Jan Hatzius came out, roughly at the same time as its call to buy Russell 2000, and said that the Fed would announce THE NEW QE^TM, as soon as next month, and as late as June. Furthermore, as Goldman has previously explained, sterilization of QE makes absolutely no difference on risk asset behavior, and it is a certainty that the $500-$750 billion in new money (well on its way to fulfilling our expectation of a total $3.6 trillion in more easing to come), in the form of UST and MBS purchases, will blow out all assets across all classes, while impaling the dollar. Which in turn explains all of today's action - dollar down, everything else (including bonds, which Goldman said yesterday to sell which we correctly, at least for now, said was the bottom in rates) up. Finally, as we said, yesterday, "In conclusion we wish to say - thank you Chairman for the firesale in physical precious metals." Because when the market finally understands what is happening, despite all the relentless smoke and mirrors whose only goal is to avoid a surge in crude like a few weeks ago ahead of the presidential election, gold will be far, far higher. Yet for some truly high humor, here is the justification for why the Fed will need to do more QE, even though Goldman itself has been expounding on the improving economy: "The improvement might not last." In other words, unless the "economic improvement" is guaranteed in perpetuity, the Fed will always ease. Thank you central planning - because of you we no longer have to worry about either mean reversion or a business cycle.

I have suggested for weeks, I suggested in my piece yesterday, that you take some money off the table, sell some of your bullets, and re-deploy. Quantitative Easing is coming to an end and there will be ramifications for the bond markets and, eventually, for the equity markets. The days of free money, newly printed money, are coming to a close as America begins to right itself and as our banking system is mostly out of the woods. The longer end of the curve, hit hard yesterday, is heading to higher yields in my opinion. We will also begin to see inflation creep in for a variety of reasons and I point specifically to the price of gas at the pump which, while no one was looking, has hit its all-time highs this week as each penny of increase adds $1 billion to household spending and gasoline has risen thirty cents in the last month.