The US Follows Japan Into A Balance Sheet Recession: What Do Investors Know and Why Is It That Policymakers Appear Clueless?Submitted by Reggie Middleton on 08/26/2011 09:58 -0400
What is it that the successful in the investment community see that policy makers in the US and Europe don't? Let's walk through the evidentiary building blocks of a US balance sheet recession and query why everyone has forgotten about the very real real estate depression.
Gold is set to finish the week lower as it is 3.7% lower so far on the week. This will embolden the momentum traders on the COMEX. There is also the risk of another margin increase from the CME. Although it is hard to know how they could justify this as gold’s leverage is now in line with most commodities and less than that on US Treasuries. The correction was primarily due to the Shanghai and COMEX margin increases. Profit taking and short selling also took place due to gold’s short term very overbought status. Sharps Pixley’s respected Ross Norman noted that the furious nature of the selling could be motivated by Jackson Hole: "I have never been a fan of conspiracy theories but I do wonder about the manner and timing of the sell-off. Much of the selling was conducted through the London p.m. fixing (when New York was active) which is a favored route for official (central bank) selling rather than being finessed into the market as a fund might prefer. It was, if you like, a statement - and quite a handy and effective one just in advance of the Jackson Hole meeting." Our conversations with people in the industry and our own experience makes us confident that this is a paper driven sell off drive primarily by speculative, leverage interests on Wall Street.
Below, for those who are still undecided we present RanSquawk's preview of what to expect, or as the case may be, not expect, from the Chairman in about 3 hours, when the embargo on his speech is lifted. Also attached is the final summary of Citi's Steven Englander of what the Chairman's thoughts would mean for the dollar, as well as various third party takes on implications for gold and other general asset prices. The consensus, as noted yesterday, is one of no immediate escalation in the push for QE3 as the stock plunge has been contained for the time being - a factor that has always been the primary catalyst for Fed decisionmaking. Granted should the S&P drop to around 1,000, everything will change. In terms of catalysts, the next FOMC meeting will be September 20, so at best silence from the Fed today will mean the market is on its own for 4 weeks, with an ugly NFP number inbetween. In other words, the next month is shaping up for yet more abnormal volatility, "as usual" for 2011.
Guest Post: Federal Reserve Policy Mixed With Extreme Weather Has Put The World On A Fast Track To Revolution And WarSubmitted by Tyler Durden on 08/25/2011 22:39 -0400
There are many factors that clearly demonstrate why it would be disastrous for the Federal Reserve to repeat their vicious Quantitative Easing (QE) policy. If you want to know a significant reason why they cannot get away with another round of QE, here is an equation for you: (Quantitative Easing + Extreme Weather = Revolution + World War III)
I am crossing Pimco off my list as a credible institution. If Bill Gross and Mohamed el-Erian are running that show, and if you have any money invested there, I recommend pulling out, fast.
After 3 months ago everyone was convinced there was no QE3 imminent ever, all it took for the lemming majority to scramble to the other side of the boat was a 20% drop in stocks. Since then, following a brief stabiliziation in stocks, based precisely on beliefs that Bernanke would once again pull something from this bag of goodies, the lemmingrati once again shifted back, and the majority now pretends it does not expect anything out of Jackson Hole tomorrow, even though it obviously does, as otherwise the market would resume its plunge. UBS earlier conducted a survey among money managers, finding that 50% of the 82 respondents expect Bernanke to limit Jackson Hole remarks only to reviewing the rationale for the Fed to pledge ZIRP until mid 2013. Then there are those who actually told the truth, such as Goldman which, in a note yesterday, says that $1 trillion in QE3 is an absolute minimum if the Fed wants to get GDP higher by at least 0.5%. To wit: "Taken together, our analysis suggests that QE3 is unlikely to be a panacea for growth. Nonetheless, our estimates suggests that $1trn of asset purchases–or an equivalent increase in the duration of the Fed's balance sheet–might increase GDP growth by up to 0.5 percentage point in the first year after any announcement of QE3." And since we are talking the truth here, why not stop pretending you care about GDP - just think of the marginal impact on Wall Street bonuses...
People seem surprised by the suddenness of the decline in the stock market. It keeps trying to rally, and the rallies keep getting sold. There’s no shortage of worrying circumstances in the real world to explain a fall in prices, and it’s normal for people to disagree about whether they should be going up or down. But the violence of this move has caught many of us by surprise. I don’t think it should have. I think there are good theoretical reasons, very simple, orthodox economic ones, to expect more of the same, to expect equally dramatic, or even more dramatic moves down, going forward. Of course, given the fact that I presumably have some sort of bets on the table, anything I say about that belief, like anything any market participant says, should be taken with a very large grain of salt. On the other side, there’s the danger that I’m merely stating the obvious, and wasting the reader’s time. (But then why are so many of us still long?). Nevertheless, despite the fact that I clearly can’t be trusted, and consequently won’t persuade many people to change their views, and even if there’s nothing startlingly original about what I’m going to say, I think it’s worth laying out what I believe to be the correct explanation of the crash as it’s still happening, so that later on, when we’re tempted to blame various scapegoats – derivatives traders, European politicians, bankers, our neighbors, immigrants, the opposing political party, etc., etc. – we’ll perhaps remember that one of these analyses was predictive of the timing and scale of the event at the time, while the others are invidious reconstructions after the fact.
- Moody's downgraded Japan's long-term sovereign rating by one notch to Aa3, with a stable outlook
- Financials came under pressure during the early European session after figures from the ECB revealed a sharp jump in lending to banks, re-igniting funding concerns
- The Greek/German spread widened partly on news that Troika has warned Greece on public payroll and public mergers
- The German IFO report was not as bad as some analysts expected, which provided appetite for risk
Marc Faber was on Bloomberg TV dispensing his traditional sarcastic and sardonic wit in copious quantities. Among the traditional topics touched upon are stocks and specifically trading ranges, "I think a lot of people will say the markets formed a double low and we have some technical indicators that are going to turn positive, so we could rally around 1,250, but as I said before, for me, we reached a high on May 2, 2011. 1,370 on the S&P--that we will not go through", on Operation Twist part 1 (already announced) and part 2 (coming): "To some extent we are in midst of QE3 already, because by announcing the Fed will keep zero interest rates until the middle of 2013, they basically encourage financial institutions to borrow short-term and to buy 10-year Treasuries" on a contrarian outlook on stocks: "I am the greatest bear on earth, but if you compare Treasury bond yields and equities, equities look reasonably attractive", on why Insider "buying" just as we have said repeatedly, is far too much ado about nothing: "Compared to all the selling in the last six months the buying is relatively muted" and lastly, like a gracious loser, Faber admits he was wrong and Rosenberg was right "David Rosenberg was right and I was wrong. The 30-Year has not made a new low. The low in December 2008 was 2.53%. Now we're around 3.4%"... although with a caveat: "Basically we have an artificial market." Alas, no strategic observations on what particular precious metal one's girlfriend would appreciate the most in the current gold-platinum parity environment.
The Keynesians had their chance. They controlled the Presidency and both houses of Congress. A Keynesian runs the Federal Reserve. They implemented everything they proposed. The $862 billion porkulus program, the $700 billion TARP program, home buyer tax credits, energy efficiency credits, loan modification programs, zero interest rates, QE1 and QE2. They increased social welfare transfers for Social Security, Unemployment Compensation, food stamps, Medicare, Medicaid, and Veterans by $600 billion since 2007, a 35% increase in four years. No one has foiled their plans. The Tea Party didn’t really exist until 2010. They didn’t lose the House until November 2010. They cannot blame the Tea Party extremists, but they do. The Keynesians have successfully increased Federal spending by $1.1 trillion, or 41% since 2007, and are running deficits exceeding 10% of GDP, but they call the Tea Party extremists. Domestic investment is still 9% below 2008 levels as the Federal government has crowded out the small businesses that create the jobs in this country. And now the Keynesians declare we need more stimulus, more programs, more debt, more quantitative easing and lower interest rates. It just wasn’t enough the first time. None of the Keynesian solutions worked during this crisis, just as they didn’t work during the Great Depression. The solution was simple, yet painful. The banking system needed to be saved, not the banks. The bad debt needed to be purged from the system. Wall Street criminals needed to be prosecuted. Bondholders and stockholders needed bear the losses from their foolish investments. Saving and investment in the country needed to be encouraged, while borrowing and consuming needed to be discouraged. Our leaders have failed to lead.
And so we return to that point when the most engaging, yet useless, topic of discussion is what Bernanke will say or the Fed will do, in this case this coming Friday at the 2011 edition of the Jackson Hole Fed meeting, and specifically Ben's keynote speech. By now we have seen endless iterations of what pundits expect will happen: from nothing to another round of QE. Today, we present SocGen's take which is that while an outright third round of monetization is unlikely for now, the Fed may well proceed with a lite version of QE in the form of "sterilized" operations, or curve targeting, aka Operation Twist, as was noted here some time ago. One thing we certainly agree with SocGen on: "If markets remain under pressure, Bernanke could be forced to commit to something next week." The market obviously knows this, in which case if the market case is for QE3 or bust (and remember: Wall Street is still stuck in beta levered world where the only P&L comes courtesy of the Fed this will be most welcome) today's latest vapor rally will be promptly nullified by Wall Street which has only 4 days left to send a very loud message to the Chairsatan.
WTI and Brent crude futures traded under pressure in the early European session weighed upon by the news that Libyan rebels have taken control of most of capital Tripoli and increasing prospects that the ongoing civil war may come to an end soon. However, as the session progressed, prices came off their earlier lows with a weakening USD-Index. News from Libya also supported the oil & gas sector in the hope that companies may resume their business in the country, which also helped European equities to trade higher. Equities received additional strength on the back of early market talk of asset re-allocation from fixed income into equities, which exerted downward pressure on Bunds. Elsewhere, weakness in the USD-Index underpinned the strength in EUR/USD, GBP/USD and commodity-linked currencies, however CHF weakened across the board partly on the back of market talk that the SNB was active in one-month forward market. In other forex news, a sharp uptick was observed in USD/JPY overnight, however there was no confirmation of any forex intervention by Japan. Moving into the North American open, the economic calendar remains thin, however the Chicago Fed report from the US is scheduled for later in the session. In fixed income, another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Nov'21-Aug'41, with a purchase target of USD 0.5-1bln is also due later.