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Neither the Fed Nor the ECB Can Stop What's Coming

Phoenix Capital Research's picture




 

 

Today, we are witnessing the investment world’s slow awakening to the fact that the monetary actions taken by the world’s Central Banks have not in fact solved the issues leading up to the 2008 Crisis.

 

In point of fact, the Central Banks’ actions have exacerbated pre-existing problems  (excessive leverage) while simultaneously creating new problems (inflation).

 

This slow awakening has taken much longer than I would have expected, but with tens of thousands of careers on the line (financial professionals) as well as tens of trillions of dollars in portfolios at risk, the vast majority of professional market participants were highly incentivized not to realize these issues.

 

However, at this point, it is becoming clear that not only are financial professionals slowly realizing that 2008 was actually “the warm up,” but that Central Banks themselves are aware that they’ve:

 

  1. Failed to solve the issues leading up to 2008.
  2. Created other unforeseen problems.

 

Indeed, this process of realization first began in the US where we had signs as far back as April 2011 that the Federal Reserve was aware that QE (AKA monetization of US debt) was less “attractive” as a policy (read: not such a good idea).

 

The vast majority of the media and Wall Street analysts failed to recognize this, though Bernanke himself admitted it in public:

 

Q. Since both housing and unemployment have not recovered sufficiently, why are you not instantly embarking on QE3? — Michael A. Kamperman, Waco, Tex.

 

Mr. Bernanke: “Going forward, we’ll have to continue to make judgments about whether additional steps are warranted, but as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate…

 

The trade-offs are getting — are getting less attractive at this point. Inflation has gotten higher. Inflation expectations are a bit higher. It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk. And in my view, if we’re going to have success in creating a long-run, sustainable recovery with lots of job growth, we’ve got to keep inflation under control. So we’ve got to look at both of those — both parts of the mandate as we — as we choose policy”

 

http://economix.blogs.nytimes.com/2011/04/28/how-bernanke-answered-your-questions/

 

This admission marked the beginning of a process through which the US Federal shifted its policies from those of aggressive monetization to those of verbal or symbolic intervention.

 

I addressed this at length in the last issue of Private Wealth Advisory. But the main issue is that the Fed backed off from rampant monetization and began to simply issue verbal statements that it would ease if needed, thereby getting the same impact (boosting stock prices) without actually having to monetize debt/ print more money.

 

Indeed, the only monetary change the Fed has made in nearly a year was the launch of Operation Twist 2 in October 2011. However, even this policy was more about meeting immediate debt issuance needs in the US rather than printing money to prop up the market.

 

Operation Twist 2 was a policy through which the Fed would sell its short-term Treasury holdings and use the proceeds to buy longer-term Treasuries. The purpose of this policy was two fold:

 

  1. To make up for the lack of foreign demand in long-term Treasuries.
  2. To provide capital to banks by permitting them to unload their long-term Treasury holdings in exchange for new cash. 

 

Regarding #1, the Fed is now obviously aware that the policies it has pursued in tandem with the Federal Government, namely maintaining low interest rates while running massive deficits and increasing the Federal Debt to the tune of $100-200 billion per month, have severely damaged the US Treasury market.

 

This is only common sense. By running Debt to GDP and Deficit to GDP ratios that are on par with the European PIIGS, the US has made it clear that those investors who lend to it for the long-term (20+ years) are likely going to experience a haircut or bond restructuring much as Greece bondholders recently experienced.

 

Because of a lack of foreign interest in long-term Treasuries, the Fed decided to step in to pick up the slack. As a result of this, the US Federal Reserve has accounted for 91% of all new debt issuance in the 20+years bracket. Put another way, the US Federal Reserve is now effectively the long-end of the US debt market.

 

Operations Twist 2 has also allowed US commercial banks to unload their long-term Treasury holdings in exchange for new capital: something most of the Primary Dealers are in dire need of. This in turn helps to explain why the US stock market has advanced despite the fact that retail investors have been pulling out of the market in droves.

 

Put another way, the markets have been ramped higher by more juice from the Fed (and corporate buybacks). However, the fact remains that this juice has come from the Fed reallocating its current portfolio holdings, NOT printing more money outright to monetize US debt via QE.

 

So while the media and 99% of analysts believe the Fed is and can continue to act aggressively to prop up the markets, the fact is that the Fed has been reining in its monetary stimulus over the last nine months, largely relying on verbal intervention from Fed Presidents to push stocks higher.

 

We at Phoenix Capital Research have known this for some time. But the general public and financial media are only just starting to realize that the Fed, in some ways, is at the end of its rope in terms of monetary intervention. This has become increasingly clear in the Fed FOMC statements.

 

Consider the latest FOMC statement released yesterday…

 

Fed Signals No Need for More Easing Unless Growth Falters

 

The Federal Reserve is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 percent target.

 

“A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below” 2 percent, according to minutes of their March 13 meeting released today in Washington. That contrasts with the assessment at the FOMC’s January meeting in which some Fed officials saw current conditions warranting additional action “before long.”

 

http://www.bloomberg.com/news/2012-04-03/fomc-saw-no-need-of-new-easing-unless-growth-slips-minutes-show.html

 

Ignore the verbal obfuscation here. The Fed knows that inflation is higher than 2%. It also knows that US growth is faltering. The above announcement is the Fed essentially admitting its hands are tied regarding more easing due to:

 

  • Gas being at $4 and food prices not far from record highs.
  • This being an election year and the Fed now politically toxic.
  • Growing public outrage over the Fed’s actions (secret loans, etc.) in the past.

 

Again, we are in a process of slow awakening to the fact that the Fed has not solved the problems that caused 2008. Instead, the Fed has exacerbated these problems (excess leverage) and created new problems in the process (inflation).

 

Fortunately for the Fed, the European Central Bank has picked up the intervention slack since the Fed began pulling back in mid-2011. Indeed, between July 2011 and today, the ECB has expanded its balance sheet by an incredible $1+ trillion: more than the Fed’s QE 2 and QE lite combined (and in just a nine month period).

 

The two largest interventions were the ECB’s LTRO 1 and LTRO 2, which saw the ECB handing out $645 billion and $712 billion to 523 and 800 banks respectively.

 

As a result of this, the ECB’s balance sheet exploded to nearly $4 trillion in size, larger than the GDPs of Germany, France, or the UK.

 

This rapid and extreme expansion of the ECB’s balance sheet (again it was greater than QE lite and QE2 combined… in nine months) indicates the severity of the banking crisis in Europe. You don’t rush this much money out the door this fast unless you’re facing something very, very bad.

 

This rapid expansion has also resulted in the ECB obtaining a similar political toxicity to that of the US Federal Reserve. Indeed, those European banks that participated in the LTRO schemes have found their Credit Default Swaps exploding relative to their non-LTRO participating counterparts.

 

The reason for this is obvious: any bank that participated in either LTRO implicitly announced that it was in dire need of capital. As a result of this the markets have stigmatized those banks that participated in the schemes, thereby:

 

  1. Diminishing the impact of the ECB’s moves.
  2. Indicating that the ECB is now politically toxic in that those EU financial institutions that rely on it for help are punished by the markets.

 

Thus the two biggest market props of the last two years: the Fed and the ECB have found their hands tied. What will follow will make 2008 look like a joke. On that note, if you have not taken steps to prepare for the end of the EU (and its impact on the US and global banking system), you NEED TO DO SO NOW!

 

I recently published a report showing investors how to prepare for this. It’s called How to Play the Collapse of the European Banking System and it explains exactly how the coming Crisis will unfold as well as which investment (both direct and backdoor) you can make to profit from it.

 

This report is 100% FREE. You can pick up a copy today at: http://www.gainspainscapital.com

 

Good Investing!

 

Graham Summers

 

PS. We also feature numerous other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s a US Debt Default, runaway inflation, or even food shortages and bank holidays, our reports cover how to get through these situations safely and profitably.

 

And ALL of this is available for FREE under the OUR FREE REPORTS tab at: http://www.gainspainscapital.com

 

 

 

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Mon, 05/21/2012 - 15:27 | 2448530 EvryInternational
EvryInternational's picture

Damed evil captialists! Everything should be free.

/sarcasm

Mon, 05/21/2012 - 19:52 | 2449213 Absinthe Minded
Absinthe Minded's picture

Don't like the ad at the end.DON'T FUCKING READ IT. The guy is contributing for zip, zero, zilch. What the fuck have you done for ZH lately???????

Mon, 05/21/2012 - 14:55 | 2448413 Snakeeyes
Snakeeyes's picture

I agree. While national account balances aren't necessarily, we can't have Germany as the only positive account balance of the bigs in Europe.

And the US have account balances like GREECE!!!!!!!!!!!!!!!!!!!

http://confoundedinterest.wordpress.com/2012/05/21/obama-wants-germany-to-stop-austerity-st-curse-of-being-fiscally-well-managed-and-act-reckless-like-the-u-s-and-greece/

Mon, 05/21/2012 - 14:49 | 2448381 the grateful un...
the grateful unemployed's picture

2008 was a financial crisis, not an economic crisis [slow motion train wreck where jobs are outsourced, capital is misallocated, toward corporate financial engineering, and not new businesses]. Bernanke is concerned with the economy because the financials don't matter [we would have improved faster from 2008 if the Fed had kept its fingers out of things, but that was Paulsons idea]  the economic problem goes back to China during the 80's, when the GOP used to hammer the Commies for everything [but they were suddenly quiet about WTO] and immigration, for which the GOP house is famously against in any form, except millionaires such as themselves [see Issa's idea on opening up immigration to high tech foreigners, while bashing the poor crossing the border] and really the two things came to be the perfect storm for the Mexican maquiladoras along the border in the 80's. business was flourishing, and then someone noticed China and the border enterprise zone was a ghost town overnight. [and the point for the Bush haters to remember is he was simpatico with house Dems on the immigration bill, but his own party blocked it]

yes we need to pay more attention to Mexico, maintain the business committment, and cut back on China, even as transportation costs, and labor costs there are going up. the issue if away from our borders, just not as far as we think.

Mon, 05/21/2012 - 14:49 | 2448379 endicott glacier
endicott glacier's picture

Listen to yourself, I extracted from your paragraphs above

Today, we are witnessing the investme

This slow awakening has taken much longer than I would have expected

However, at this point, it is becoming clear

Are all these things becoming apparent to you now after posting for so long on this forum? seems like you are a slow learner who like to regurgitate same items over and over with different words and mixes, someday you might post something original and useful for your audience

Mon, 05/21/2012 - 18:32 | 2449062 SamuelMaverick
SamuelMaverick's picture

Phoenix Capital has been doing a service for the readers of Zero Hedge by keeping us continually updated and covering this excruciatingly slow motion train wreck of the problems in the EU. I appreciate his analysis, and look forward to it every week. His articles stick to Macro, and highlight metrics that are overlooked everywhere else ( except ZeroHedge and various other blogs). Macro analysis is a whole different animal than trading, and if you want his trading recommendations then you gotta pay. For all you crybabies that bitch about Phoenix promoting his trading service, why dont you go to Marketwatch or Yahoo Finance and get the 'free' MSM's bullshit pump and dump propoganda - go buy Facebook and GM and Solar stocks. Cramer says  BAC is a buy, everything is okay, nothing to see here, move along !!!  

Mon, 05/21/2012 - 22:27 | 2449563 vast-dom
vast-dom's picture

Phoenix Capital has yet to be right once! What have you been reading? FREE REPORTS FREE REPORTS FREE REPORTS!!!! HAHAA!

Mon, 05/21/2012 - 16:21 | 2448692 HarryM
HarryM's picture

Today we are witnessing a 12% drop in the VIX - - Bam!!!!

 

With a good chance for more of the same tomorrow

Mon, 05/21/2012 - 14:47 | 2448371 Joebloinvestor
Joebloinvestor's picture

The battle of the fiats.

The powers to be are demonizing gold and trying to blow up the precious metals market.

If they don't, the power of the printing press gets severly restricted (unless they start LYING about how much gold they own) which they can't let happen.

I expect the EU and the US to print like mad.

Mon, 05/21/2012 - 14:37 | 2448351 New American Re...
New American Revolution's picture

It's Deja Vu all over again.  C. Stengel

This is 1931 all over again, the following is an exerpt from my book, "New American Revolution: The Constitutional Overthrow of the United States Government"...

1931: The End of the Phony Gold Standard

     It was going to be a bad year.

     Eugene Meyer, who had presided over the Reconstruction Finance Corp (RFC) had recently been appointed to the Washington FRB Board.   Along with Chairman Roy Young, they were trying to wrest control of American monetary policy away from Harrison, Morgan, and the NY Federal Reserve Bank.  

     One of the early authors of the Federal Reserve Act was H. Parker Willis, who was now its greatest detractor.   He was testifying to Congress and anyone else who would listen that the inflationary practices of the FRB were tying up credit that was needed elsewhere to lead the economic recovery which Harrison kept expecting to be right around the corner.   Willis was putting so much pressure on Harrison that he appealed to Willis often time mentor and employer Senator Glass of Virginia. to make him stop.

     Harrison and Morgan’s problem, was that not only was America’s stock markets on the ropes, Europe was going down for the 3rd time.

     On May 11th, Kredit Anstalt Bank of Austria, a Rothschield bank declared bankruptcy.

     On May 29th, the Austrian central bank went bankrupt.

     On June 5th, Germany declared there would be no more war reparation payments.

It was now Germany’s Reichsbank’s turn to go BK.

     Throughout June the central banks of America, France, England and the BIS were working on a $100 million bail out for the Reichsbank, but as soon as BIS had settled upon that figure, it jumped to $500 million which was out of the question.

     With Morgan on the line, the New York Federal Reserve Bank had put together a tag team to badger Hoover to acknowledge and reassure the ‘fundamental soundness’ of Germany.   By accident Mayer found out about it and went postal on both Harrison and Hoover as it was an implied consent to back up Germany, the act of which could never happen and would lead to an even greater disaster once reneged.

     Harrison and Morgan, et al, backed off Hoover, and Hoover backed off Germany.

     All they would get is a ‘standstill agreement’ which was a simple commitment by the major countries of the world to hold German paper but buy no more.

 

Still a Train Wreck: Europe folds

     Germany left the gold standard over the weekend of July 12.   England abandoned her phony pound gold standard on September 21st.   Soon the world was pounding on the doors of America for gold as Japan had also abandoned the gold standard to avoid a run.

     Now Washington, via Meyer and Young, put the pressure to Harrison to raise interest rates to stop the gold run.   On October 16th Fed funds jumped to 2.5% and on the 23rd of October higher still to 3.5% and 4% by December.   Gold pays no interest and there was enough faith in America that this was sufficient to stop the exodus of gold from the government’s reserves.

     On December 11th, the New York Bank closed making the final tally for 1931standing at 2,293 failed banks.

 

www.nar2012.com

 

Mon, 05/21/2012 - 18:21 | 2449046 DosZap
DosZap's picture

Credit the dude who said it;

It's Deja Vu all over again.  C. Stengel

Yogi Berra, after witnessing back to back home runs by Mickey Mantle, and Roger Maris.

Casey was the Coach.

Mon, 05/21/2012 - 14:49 | 2448383 Lester
Lester's picture

The Dejavu quote is attributed to Yogi Bera

Mon, 05/21/2012 - 17:18 | 2448890 El Oregonian
El Oregonian's picture

I believe I have heard that before/again...

Mon, 05/21/2012 - 18:39 | 2449074 DosZap
DosZap's picture

El Oregonian

I believe I have heard that before/again...

 

 

YEAH, its called PROPAGANDA.

(see the new rules, that are old rules,that have always been in play.)

Mon, 05/21/2012 - 23:24 | 2449641 jeff montanye
jeff montanye's picture

not so much 1931 as april 1930 coincides with march 2012 (it's later than you think).  http://stockcharts.com/freecharts/historical/djia19201940.html

p.s. the drop from dow 381 to  199 was 48% but it still traded for 41 some 26 months later, an 86% loss from the bear market rally top (but there was all this deflation so it wasn't really quite that bad ....).

p.s.s. from the 199 first bottom to the second one is a 79% loss so the main lesson is avoid the second half of the primary bear market. or as john hussman said: 

As for my opinion about market conditions, I have to agree with Richard Russell, who said last week "I think we're now in the second half of the primary bear market that started back in 2007. It won't be pretty." Richard is undoubtedly the pre-eminent authority of Dow Theory, which is often disparaged, but actually holds up nicely in historical data if you make Rhea and Hamilton's writings operational. As a side note on this, from a signal extraction standpoint, you can think of the Transports as carrying a signal about demand and distribution, and the Industrials carrying a signal about production, and both carrying a common signal about more general factors like risk aversion and so forth. From that perspective, the initial weakness we saw in the Transports, coupled with resilience in the Industrials, has been consistent with the buildup of unsold inventories we've seen in recent months. The groaning weakness of both indices in recent weeks - breaking simultaneously below the sideways channel that Hamilton refers to as a "line" - is a classic Dow Theory sell signal.

Mon, 05/21/2012 - 17:37 | 2448933 boiltherich
boiltherich's picture

Let's hear it for the owners equivalent rents, the BLS gimick for not measuring inflation in the largest single line item of houshold expence, the cost of shelter.  Rents here are up about 40% from some 18 months ago and it will never be counted.  More than ten percent of houses sit vacant as rentals soar to never dreamed of prices.  Whatch as those pricks in government banker cartels bulldoze recently built forclosed houses while the poor resort to renting substandard hovels.  I have got to get out of America. 

Tue, 05/22/2012 - 05:12 | 2450135 DeltaDawn
DeltaDawn's picture

I have a solution for you. My new venture is mailorderhusbands.com. If selected, you will be placed in the loving hands of a 3rd World bride and live on less than $2/day like a king. Cost to you? Airfare and a $500 placement fee for my matchmaking services. Only the virile and strong should apply. No Viagra users, please.

Mon, 05/21/2012 - 16:46 | 2448789 Bollixed
Bollixed's picture

The real Deja Vu here is more self promotion by NAR2012,,,

Do NOT follow this link or you will be banned from the site!