Quantitative Easing

In a letter written by republicans bashing the Fed's QE2, the four congressmen and senators amusingly insist "that monetary policy decisions by the U.S. Federal Reserve must be free and independent from political pressures." It is not that we disagree. But even a blind monkey may see the irony of a political group telling the Fed to do something. The only way the Fed will be independent is if it is terminated. Why is it so difficult for these politicians to grasp this. And no, removing the maximum employment mandate won't do jack - the only thing that will happen is more papers from various Fed professors will be published explaining how, suddenly, they have discovered that printing massive loads of money is in fact deflationary.

The WGC has released its complete Third Quarter gold market outlook. To summarize: major demand is seen out of China and India, whose surging populations will buy ever more PM due to "rising income levels, high savings rates and strong economic growth." Demand is seen coming from the jewelry sector, as well as from institutions, including central banks, and a jump in industrial demand "on the back of renewed growth in the electronics industry, due to the majority of semi-conductors being wired by gold." Nonetheless, even as demand continues growing, supply is rising as well: "On the supply side, we reiterate our projection that total mine supply is likely to trend higher. This is due to mine project expansions, a ramping up of production to meet the recovery in gold demand and the diminishing scope for producer de-hedging in 2010. Higher supply is also expected to come from China, Australia and US, although this may be partially offset by lower output from countries such as South Africa and Peru due to declining ore grades and rising costs." Ultimately, the only important question is whether QE will ever end. Anything less than a Yes answer, means there is virtually no upside limit to gold, absent an occasional correction.

This is an extensive post designed for those who want to truly comprehend what I perceive to be both the root causes and the practical solution to the Irish sovereign debt problems and the threat of Pan-European possibly global financial and economic contagion.

The country which has languished in 6th position in the world, with combined gold holdings of 1,054 tonnes (just behind the GLD ETF), may have finally awoken that it needs to buy about 7,000 tonnes of gold to catch up with the US, and its 8,133 tonnes (or even France with 2,435). China daily 21st Century Business Herald has just reported that: "China is considering raising its gold reserves, a move which would push
up gold prices in the future, a person providing consulting services to
the Chinese government said." Conveniently, China can now buy gold notably cheaper courtesy of a $100 dip in gold price as recorded over the past week, precipitated by... China inflation concerns. When next month the politburo reports below consensus inflation (as the number is imaginary to begin with), look for gold to surge, but not before China manages to load up at depressed prices.

Could it be as simple as buy the rumor and sell the news? This sell off will end up as a whimper, not a bang. But the “Big One” for the markets is coming, and could unfold as early as the next quarter. Please tighten up you stops and your risk control accordingly.

Everyone else can eat cake ...

EUR came under renewed selling pressure on Tuesday in spite of the fact the Irish government continued to argue that it does not need to tap the primary markets until next June. Still, given that the Irish banks are plagued with soar loans, which as a result is expected to lead to another liquidity injection suggests that the country may be forced to tap the stability fund just to save its beleaguered banks. GBP posted heavy losses against the USD on Tuesday which rose sharply amid renewed uncertainty over the Eurozone and further tightening moves in Asia. The USDJPY continued to edge higher and moved to mid-83.00 levels and toughed on highest levels since October the 5th amid a stronger USD which rose following ongoing uncertainty over the Eurozone, as well as potential monetary policy tightening moves by the PBOC.

Once again Zero Hedge pulls a fast one on the MSM. We highlighted this earlier today, but it bears repeating: in a post yesterday we asked rhetorically: "Are republicans preparing for a push to eliminate the "maximum employment" part of the fed's dual mandate?" As of a few minutes ago, Reuters has answered: "Republicans want Fed focus solely on inflation." Those who have read us will find absolutely nothing new here, but here is the gist of the Reuters piece: "Two U.S. Republican lawmakers said on Tuesday the Federal Reserve should focus solely on inflation and ditch its "dual mandate" to promote both price stability and full employment. The pressure from Senator Bob Corker and Representative Mike Pence adds to the pile of international criticism over the central bank's plan to buy an additional $600 billion in government bonds to try to speed up a sluggish economic recovery." As we stated before, while we ridicule the fact that Bob Corker is suddenly all about curbing the Fed, despite that 5 of his top 15 contributors are banks, and last year did his best to make the Paul-Grayson "Audit the Fed" initiative disappear, the fact that this idea is finally making the rounds should be endorsed by all those who believe that a bankrupt America is a bad America. As the Fed will not cease from doing everything it can to boost banker recoveries, under the guise of stimulating employment, the only way to curb its central planning aspirations is to pass legislation that will make it focus solely trillions of excess dollars creating asset bubbles across the global economy.

Hedge Fund Net has released its preliminary October HF performance breakdown by strategy. Aside from the winners and losers (biggest winners were not surprisingly funds focused on the bubbling Emerging Markets space, the losers were short-biased funds), the notable news for October is that following a sizzling QE2-hype driven September in stocks, engineered in part to prevent redemptions and liquidations, HFN reports that allocations to HFs surged to the highest in 2010, as assets in the hedge fund community hit what we believe is a record $2.4 trillion. In a way this is merely compensation for outflows from traditional retail fund outflows, which as we have been documenting have hit nearly $100 billion for the year, as the rich continue to benefit from Bernanke's economic policies (which is what they are at this point), as everyone else, who has just a token stake in stocks, continues to suffer and withdraw capital for maintenance requirements.

We don't care (from an investor standpoint) IF the game is rigged, as long as we understand HOW it's rigged so we can play along at home.

Even as today's POMO is helping risk assets, but doing nothing for rates (and leading to a flattening of the curve), leading some to speculate that the bond market is getting very nervous about what the FRBNY's intervention may mean for rates, there are some who believe that the Fed will continue to influence the curve favorable, leading to ongoing tightening (and flattening) of the yield curve. One of these, of course, is David Rosenberg. Another, as presented below, is Guggenheim's Scott Minerd, whose previous insights on markets have always been controversial and certainly though provoking. To wit: "I don’t believe in the urban legend of the bond bubble. On the contrary, I believe the yield on the 10-year note will continue its decline, to 2.0 percent, and possibly lower. The “old news” happening to a new economy will most likely be  a prolonged period of low long-term interest rates and low yields. While the idea of a sustained low-yield environment may be unfamiliar to the current generation, it’s not unfamiliar to the former one – just ask anyone who remembers the 1940s, a time when the average yield on 10-year U.S. Treasuries was 1.99 percent, for the entire decade." Then again, the 1940s were a rather simpler time, in which the rate framework did not define about $1 quadrillion of interest-rate derivative products. The reverse feedback loops created now are so unpredictable and confusing that anyone who claims they know what might happen in either extreme case is certainly full of it. Amusingly, even Minerd realizes this, and in his outlook for the long-term (beyond five years) he acknowledges that the endgame is afoot: "Nonetheless, just as a broken clock is right twice a day, the economy
will inevitably reach a point where interest rates will rise. When they
do, I believe they will rise for a long, long time. What happens after
that? The ultimate end game, I believe will be a paradigm shift for
money".

Rosenberg looks for hints on how to navigate the market, and finds them in the CFTC COT report (which despite not reporting last week due to the Veterans' Day holiday, is regularly posted on Zero Hedge to glean precisely such clues). To wit: "The asset classes are merely unwinding the excess risk-on trades and pricing out the chances that QE3 will ever see the light of day. Yes, this is what the market was starting to think since Bernanke left the door open for more in the press statement, but we are finding out ex-post that the Fed chairman has less support around the table than was generally perceived. It may pay for the time being to avoid the areas of the market where net speculative long positions exist and is in the process of unwinding. Long covering is a critical source of selling pressure."

As if the rest of the world telling Ben Bernanke he has finally flipped, was not enough, here comes the opposition from within, after 23 public figures, among which economists, financiers, hedge fund managers and Dick Bove (not sure what he is) have sent an open letter to the Bernank demanding QE2 be immediately pulled. With the imminent market collapse that would follow such an action we are not surprised to see Jim Chanos among the list of signatories, although that long-biased Paul Singer of Elliott Associates would endorse such a contrary to his interests letter, is interesting to say the least.

This isn’t about jobs at all. It’s about power. It’s about who is going to dictate policy to the rest of the world. Bernanke wants emerging markets to bear the costs of a financial crisis that originated on Wall Street and was nurtured every step of the way by the easy money policies of the Federal Reserve.

We salute Jim Grant for joining the ever greater chorus demanding a return to the gold standard: "Let the economists gasp: The classical gold standard, the one that was in place from 1880 to 1914, is what the world needs now. In its utility, economy and elegance, there has never been a monetary system like it." And no, as Jim Rickards among others claim, a return to the gold standard would not be deflationary...if gold were to be converted to the USD at between $5,000 and $35,000/oz.