At one point, the music will stop, but for now, I agree with Britney Spears, you got to keep on dancing till the world ends. And despite what those bears on Zero Hedge think, the world isn't ending anytime soon...
Druckenmiller Calls Out The Treasury Ponzi Scheme: "It's Not A Free Market, It's Not A Clean Market", Identifies The Real Bond ThreatSubmitted by Tyler Durden on 05/14/2011 09:28 -0500
We hadn't heard much from legendary investor Stanley Druckenmiller since last August when he decided to shut down his Duquesne Capital hedge fund. Until today. In a must read interview, the man who took on the Bank of England in 1992 and won, says that he join the camp of Bill Gross et al, making it all too clear that all the recent fearmongering about the lack of a debt ceiling hike by the likes of Tim Geithner, Ben Bernanke and, of course, all of Wall Street, is misplaced, and that the real threat to the country is the continuation of the current profligate pathway of endless spending. From the WSJ: "Mr. Druckenmiller had already recognized that the government had
embarked on a long-term march to financial ruin. So he publicly opposed
the hysterical warnings from financial eminences, similar to those we
hear today. He recalls that then-Secretary of the Treasury Robert Rubin
warned that if the political stand-off forced the government to delay a
debt payment, the Treasury bond market would be impaired for 20 years. "Excuse me? Russia had a real
default and two or three years later they had all-time low interest
rates," says Mr. Druckenmiller. In the future, he says, "People aren't
going to wonder whether 20 years ago we delayed an interest payment for
six days. They're going to wonder whether we got our house in order." Which begs the question: if interest rates are so low today, is the market not appreciating the current path of "financial ruin"? And here is where Druckenmiller joins the Grosses and the Granthams of the world. Asked if the future is not so bad judging by today's low bond rates he says, "Complete nonsense. It's not a free market. It's not a clean market." The Federal Reserve is doing much of the buying of Treasury bonds lately through its "quantitative easing" (QE) program, he points out. "The market isn't saying anything about the future. It's saying there's a phony buyer of $19 billion of Treasurys a week." Of course, there is another name for this type of arrangement and so far only Bill Gross has used it: Ponzi Scheme.
Goldman Fires The Second Shot Across The QE3 Bow: "Successful Fiscal Consolidation Needs Monetary Policy Help"Submitted by Tyler Durden on 05/13/2011 20:02 -0500
Yesterday, when we presented the Bloomberg interview of Princeton economist and former Fed vice chairman Alan Blinder, we speculated that his statement that "more easing is necessary" was the first shot across the QE3 bow. Today, Goldman's Sven Jari Stehn has fired the second one in a paper just released titled: "Fiscal Adjustment without Fed Easing: A Tall Order" in which he basically takes our conclusion from the Blinder interview to the next level. As Blinder said previously, in order to improve the once again deteriorating labor picture, more fiscal stimulus would be necessary. That, however, is impossible, especially in a Congress where everyone is now promising $4 trillion of deficit cuts over the next few years. The only difference is how this cutting will be achieved: republicans want spending cuts, while democrats are demanding tax hikes for the richest. While neither approach will work in the US without the shock of a bond-crash induced austerity, Goldman conducts an thought experiment in which it evaluates the effectiveness of a tax-based and a spending-based fiscal consolidation. While finding that on average spending based deficit reduction is more effective, it only truly works in parallel with assistance from monetary policy: be it an interest rate decrease (impossible due to ZIRP) or further Large Scale Asset Purchase (QE) program. In other words, the only thing that can prevent an economic contraction in the next 2 years of semi-austerity, will be more monetary easing.
A little under a year ago Moody's Mark Zandi and Princeton economist and former Fed vice chairman Alan Blinder penned a paper titled "How we Ended the Great Recession" which did nothing but extoll the virtues of spending trillions in both fiscal and monetary stimuli and preventing U3 from hitting 16% (of course how one proves a counterfactual is irrelevant: just remember - if the Fed disclosed its top secret bailout plans the world would end. Same thing here - accept it - after all the guy is a professor at Princeton). In a nutshell Blinder is nothing but Paul Krugman on steroids: a man who believes that there is nothing worse in this world than establishing fiscal (and monetary) discipline now. Well, in an interview with Tom Keene earlier, Blinder fired the first shot across the QE3 bow, telling his Bloomberg host that the US needs "somewhat more" fiscal stimulus once again in order to boost employment (hold on: didn't we end the Great Recession, and certainly the normal one in the summer of 2009 according to the NBER?). How this would be accomplished in the current climate is not explained. Instead what Blinder says makes one wonder just who is on the tenure committee at Princeton - when asked how we bring the deficit in without austerity, the Princetonian responds: "Unfortunately I think it is very subtle for most political processes especially for the political process in the US. What we should be doing is somewhat more fiscal expansion but at the same time legislating into law fiscal consolidation for the future. Starting 2 years from now, 3 years from now, 18 months from now. But not now." Of course never now: why bite the bullet now when it can be kicked to some other administration in the indefinite future? Especially when tenure money and/or Wall Street bribes are at stake...
The end of the second round of quantitative easing (QE II) is going to be a complete disaster for the paper markets -- specifically commodities, stocks, and then finally bonds, in that order, with losses of 20% to 50% by the end of October. The only thing that will arrest the plunge will be QE III, although we should remain alert to the likelihood that it will be named something else in an attempt to obscure what it really is. Perhaps it will be known as the "Muni Asset Trust Term Liquidity Facility" or the "American Prime Purchase Program," but whatever it is called, it will involve hundreds of billions of thin-air dollars being printed and dumped into the financial system.
Jeremy Grantham Goes Bearish: "Now Is The Time To Fight The Fed" And "Stocks Trading 40% Above Fair Value Are Badly Overpriced"Submitted by Tyler Durden on 05/11/2011 10:48 -0500
Just released from Jeremy Grantham, who has gone, for all intents and purposes, "balls to wall" bearish. "I do not feel the same degree of confidence that I did, which was considerable, that the Fed could carry all before it until October 1 of this year. A third round of quantitative easing would very probably keep the speculative game going. But without a QE3, there seem to be too many unexpected (indeed unexpectable) special factors weighing against risk-taking in these overpriced times. I had recommended taking a little more risk than was justified by value alone in honor of Year 3, QE2, and the Fed in general. Risk now should be more reflective of an investment world that has stocks selling at 40% over fair value (about 920 on the S&P 500) and fixed income, manipulated by the Fed, also badly overpriced. Although the taking of some “extra” risk by riding the Fed’s coattails has been profitable for six months, I admit to being a bit disappointed: I really felt the market had the Fed’s wind in its sails and would move up deep into the 1400 to 1600 range by October 1, where it would be, once again, over a 2-sigma 1-in-44-year event, or, officially, a bubble. (At least in a world where GMO is the official.) At such a level, I was ready to be a real hero and absolutely batten down the hatches, become extremely conservative, and be prepared to tough out any further market advance (which, with my record, would be highly likely!). The market may still get to, say, 1500 before October, but I doubt it, especially without a QE3, although the chance of going up a little more by October 1 is probably still better than even. And whether it will reach 1500 or not, the environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So now is not the time to float along with the Fed, but to fight it. Investors should take a hard-nosed value approach, which at GMO means having substantial cash reserves around a base of high quality blue chips and emerging market equities, both of which have semi-respectable real imputed returns of over 4% real on our 7-year forecast. The GMO position has also taken a few more percentage points of equity risk off the table."
And so the Bill Gross juggernaut begins rolling. Reuters reports that "Influential investment veteran Jim Rogers said on Tuesday he plans to short U.S. Treasuries as soon as this afternoon as he expects the end of quantitative easing to pressure government bonds." Odd. Where have we written/heard that before. But of course, who listens to Bill Gross (the largest bond manager in the world) and Jim Rogers (the co-founder of Quantum) - surely they are no-nothing fools (who just happen to agree with our initial assessment that in the absence of QE2 all bets will be off). Reuters adds: "Rogers said he expects the U.S. dollar to rally when the Federal Reserve's unconventional monetary measure ends in June. "I'm not short bonds yet but I plan to short bonds - maybe this afternoon if I get around to it," Rogers told Reuters Insider television." Recently Jim Rogers correctly pointed out that silver is not in a bubble (a finding confirmed yesterday by Zero Hedge when we demonstrated that non-commercial spec longs in silver are at 2 year low) and continues to be long precious metals until such time as silver really hits the parabolic phase, well north of $100 (by which point the dollar will likely be confetti anyway). So as ever more influential asset managers turn outright hostile on rates, just how much longer will the Fed's vol selling yield suppression scheme work for?
One of the key catalysts that precipitated the perfect storm in precious metals selling last week was the WSJ article that John Burbank, among others, had sold off some or all of his holdings. Today, in a Bloomberg TV interview, Burbank refutes all the skeptics who think the top of gold is here, and makes it clear that while his offloading of the precious metal was merely a temporary trade to lock in profits, the long term fundamentals for gold are as strong as they have every been. So here it is: "The biggest reason to stay in gold is because central banks around the
world can see the writing on the wall long term, which is that the
dollar will be devalued one way or another and that Congress has no
appetite for hard decisions which would be deflationary in nature, and
therefore, make the dollar higher than gold and not as much of a
necessary holding. You also have the Chinese consumer, who has become a
very large buyer, matching almost the Indian consumer and I think quite
clearly, will exceed the Indian consumer. I think ultimately, physical
gold is the story. It is a scarcity story. The more the U.S. dithers and
the more the Fed is willing to print money, as opposed to dealing with
inflation properly, the more this trend will happen. That is the biggest
reason to stay in gold right now. Otherwise, most of the beneficiaries
of quantitative easing will be backing off as most investors get back to
neutral."... "I think that long-term it is clear sovereign yields will be weak and commodities will be strong. It just a question of when we get there and when we price that in." As for risk assets heading toward June 30: "I think risk assets sell off. I think they sell off now into it and we bottom again in commodities this summer." And there you have it, straight from the horse's mouth, instead of from some FRBNY pre-cleared journalist.
Atlantic Capital Management submits the following extended report on recent developments in the monetary arena: "The Federal Reserve System operates monetary policy as if economic activity during the asset bubbles was representative of true economic potential. To the Fed, the Great Recession has pushed economic activity so far below that potential it can stimulate with zero interest rates and quantitative easing well into the future, even after two years of it already. We believe the Fed is mistaken for the reasons contained in this report. Chief among them is that The Great Recession actually brought the economy back down toward its true potential. Further than that, it is likely that the current weak recovery is still running above true potential, and that is leading to a wide array of problems. Inflation pressures are the biggest."
Another sign of the increased appreciation of gold as an important asset came from Germany today where Angela Merkel’s budget speaker and his opposition counterpart have urged Portugal to consider selling their gold. Norbert Barthle, Germany’s governing coalition budget speaker and his counterpart Carsten Schneider from the Social Democrats, the biggest opposition party urged Portugal to consider selling some of its gold reserves to ease its debt problems. They called for a review of Portugal’s request for financial aid to include gold and other potential asset sales. The German lawmakers did not specify who should buy the gold from the Portuguese central bank but given the challenges facing Germany and the Eurozone it is likely that the Bundebank and the ECB would be willing buyers – if the gold is not already encumbered due to Portugal’s membership of the Eurozone. Meanwhile creditor nation central banks continue to accumulate gold reserves as seen with the breaking news from the Financial Times that the central bank of Mexico has been diversifying their currency reserves (largely in dollars) into gold with the purchase of 100 tonnes of gold bullion in February and March.
A "Confuzzled" Einhorn Compares Melt Up Market To Charlie Sheen, Gives Up On Hedging: Goes Long, Keeps GoldSubmitted by Tyler Durden on 05/02/2011 13:23 -0500
From the just released Greenlight Capital letter: "Much like Charlie Sheen, who seems to believe that all publicity is good publicity, recent market behavior suggests that we are in the part of the cycle where “all news is good news.” This was true for the broad market, which shrugged off the continued escalation of commodity prices, unrest in the Middle East, a catastrophe in Japan, tightening monetary policy outside the United States and a deceleration of domestic economic growth....this quarter we were repeatedly confuzzled when we read company news announcements that we expected to cause falling stock prices, only to see them rise instead – and sometimes sharply at that. Nonetheless, we believe that this environment is cyclical, and that it will continue this way... until it doesn’t. Since we don’t expect to be able to call the turn, we believe our best course is to concentrate on generating better alpha." In other words, shorting is for wimps. It appears everyone has now given up on hedging. Last time this happened was in the summer of 2008 when nothing could dent the market.
While it will not surprise anyone that Japan, which for the past 3 decades has been a monetary policy basket case caught in what bankers like calling a deflationary spiral (yet which others like Sean Corrigan merely define as prices re-indexing to a fair value absent endless cheap credit crutches), has constantly had to resort to a record loose monetary policy coupled with endless episodes of quantitative easing, some may not know that over the past month Japan has seen its current account balance swell by $250 billion, or nearly half the entire Fed QE2 monetization mandate. And as the BOJ continues to disclose the full extent of the Japanese economic devastation following March 11, we are confident that very soon the most recent episode of Japanese “printing” will surpass the $600 billion that the Fed is injecting into the US economy (in addition to the roughly $250 billion in Treasury bonds monetized by the BOJ each year): an amount roughly 5 times greater than America's when expressed as a ratio of GDP. It is thus no surprise then that Bernanke does not seem too concerned with the purported end of QE – after all money printing is merely moving from developed world point A to developed world point B. And thanks to monetary linkages of “globalization” all this brand new money will once again find its way into speculative assets, and thus, Fed mandate #3 favorite - Russell 2000. Below we provide a closer look at what exactly the current and future, Japanese QEasing will look like.
The only things that are doing well are the stock and bond markets. But the markets and the economy are totally different things – except, over a very long period of time, there's no necessary correlation between the economy doing well and the market doing well. My view is that the market is as high as it is right now – with the Dow over 12,000 – solely and entirely because the Federal Reserve has created trillions of dollars, as other central banks around the world have created trillions of their currency units. Those currency units have to go somewhere, and a lot of them have gone into the stock market. As a general rule, I don't believe in conspiracy theories, and I don't believe anything's big enough to manipulate the market successfully over a long period. At the same time, the government recognizes that most people conflate the Dow with the economy, so it is directing money toward the market to keep it up. Of course, the government wants to keep it up for other reasons – not just because it thinks the economy rests on the psychology of the people, which is complete nonsense. Psychology is just about the most ephemeral thing on which you could possibly base an economy. It can blow away like a pile of feathers in a hurricane
Of course the Government is still borrowing $140Bn a month and the Fed is still "easing" by handing their Bankster buddies another $120Bn a month so our run rate, at the moment, is still $3.1Tn a year to keep all these plates spinning.
From the bears who explained Quantitative Easing, we now get a crash test dummy simplifying the Federal Reserve's current outlook on life, the universe and everything, courtesy of yesterday's press conference. All confusion abandon ye who enter.