The first news that caught my attention this morning (and made me laugh so much I almost cried!) was a “leaked” piece
by the Federal Reserve via “Senior Economic Reporter” Steve Liesman of
the CNBC. Apparently he is led to believe and needs to share with us
that we should not expect much from Fed Chairman Ben Bernanke this
coming Friday at Jackson Hole. Nice try Fed! Managing expectations and
through the PR agent for Buffet/Fed/Treasury and anyone who is playing
the “political” game of “spinning” is a great attempt to fool us – but I
will however “fade the fade” so to speak.
The Fed can boast what?
Think about it: Chairman Bernanke has used 3,000 billion US Dollars to create what? Nothing! Unemployment is still above 9.0 per cent, the housing market is still in a slump, and now the only successful thing going for the Fed is the stock market's rise from the floor at 666.00 in March 2009. But now there's talk of an interbank funding crisis and unrealised losses. It certainly smells like 2008, doesn't it? Or what about August 2010? – Yes! It is an almost 100 per cent analogy to last year.
Think about it: Chairman Bernanke has used 3,000 billion US Dollars to create what? Nothing! Unemployment is still above 9.0 per cent, the housing market is still in a slump, and now the only successful thing going for the Fed is the stock market's rise from the floor at 666.00 in March 2009. But now there's talk of an interbank funding crisis and unrealised losses. It certainly smells like 2008, doesn't it? Or what about August 2010? – Yes! It is an almost 100 per cent analogy to last year.
Apologies from Ben unlikely
If you were Fed Chairman Bernanke – what would you do? Raise your hand and say: Sorry! I was wrong – dealing with debt through issuing more debt was wrong – I should have known better, but I was the world class expert on Japan, before I got this, my first real job. I am extremely sorry!
If you were Fed Chairman Bernanke – what would you do? Raise your hand and say: Sorry! I was wrong – dealing with debt through issuing more debt was wrong – I should have known better, but I was the world class expert on Japan, before I got this, my first real job. I am extremely sorry!
This is not likely to happen, is it? Instead when looking at what you
can expect from Bernanke you should look at his academic work, at his
policy response when faced with low growth, falling inflation
expectations, a banking sector under pressure, and alarming unemployment
numbers: the response has always been the same - print more money!
Source: Google images
Japanisation argument and delayed form of QE
You see, often the argument Bernanke uses concerning Japan and the newly coined economic model called "Japanisation" is that Japan did too little and too much unannounced. Meaning: Quantitative Easing 3 is coming – whether he has the political establishment and full Federal Open Market Committee board behind him or not, he will move to some shape or form of QE – it’s in his "genes", so to speak. He may delay the “official” start and announcement of it until the S&P 500 tanks to below 1000, but that will probably happen already on Friday if he is seen “failing” to give the market what it needs. It's pretty much certain that: fade the fade from the Fed is the game.
Jackson Hole outcome surveys point to no more QE
It should be noted however that based on the surveys I have seen on the expected outcome from Jackson Hole, the Quantitative Easing option has little support anyhow – people are mainly expecting a continuation of the last FOMC meeting – indicating lower rates for longer, a negative assessment of the outlook for the U.S. economy and some emphasising by the Fed about its willingness to do everything needed to restart the U.S. economy.
It should be noted however that based on the surveys I have seen on the expected outcome from Jackson Hole, the Quantitative Easing option has little support anyhow – people are mainly expecting a continuation of the last FOMC meeting – indicating lower rates for longer, a negative assessment of the outlook for the U.S. economy and some emphasising by the Fed about its willingness to do everything needed to restart the U.S. economy.
The second highest probability in the survey is Operation Twist – and this paper called:
“Operation Twist and the effect of Large-Scale Asset Purchases” from
the Federal Reserve Bank of San Francisco, written by Titan Alon and
Eric Swanson, from April 25, 2011 is an essential read to understand the
Fed and its thinking. The paper links Operation Twist from the Kennedy
Administration with QE2.
Strategy update August 2011
Now in terms of the market and allocation it has been a while since my latest update – to recap recent “signals” – I said one could go short in May with the note: No Silver Bullets and then neutral in July. Now one could consider going outright long again (with a tight mental stop/loss below 1080 in S&P cash) based on reasons which are more tactical short-to-medium term based than an outright belief the market is cheap. It would be a fourth wave correction – after the steep third wave down and ahead of the final fifth wave – which I think will be the end of Dirigisme (or managed economies).
Now in terms of the market and allocation it has been a while since my latest update – to recap recent “signals” – I said one could go short in May with the note: No Silver Bullets and then neutral in July. Now one could consider going outright long again (with a tight mental stop/loss below 1080 in S&P cash) based on reasons which are more tactical short-to-medium term based than an outright belief the market is cheap. It would be a fourth wave correction – after the steep third wave down and ahead of the final fifth wave – which I think will be the end of Dirigisme (or managed economies).
Reason # 1: The 30-year T-Bond yield is getting to the low end of a long-term trend – indicating some “turn around” in risk-off.
Source: Stockcharts.com
Reason # 2: The market is oversold and inflows have started (and Bernanke can only positivelysurprise)
Source: Stockcharts.com
Reason # 3: The perceived “funding crisis” is overdone for now at least….. - see USD into EUR basis swap.
Source: Bloomberg LLP
A Morgan Stanley Research paper pointed out that the largest European
banks are more than 90 per cent through their funding targets for 2011 –
which does not mean there is no more renewed pressure, but for now they
can “live” through 2011 and the real issues is in Q1-2012. Furthermore,
it should be noted the LIBOR and EURIBOR is fixing higher every single
day – small increments, though still higher.
Reason # 4: The rest of the arguments…..
- Dividend yield is above 10 year yield in the US
- The always bullish analysts appear to be all turning bearish
- Lack of understanding from Anglo-Saxons on the true dilemma in Europe (The political will to do whatever needed in the last minute modus operandi of European history)
- Relatively higher consumer spending in my favourite leading indicator: http://www.consumerindexes.com/
- Growth forecast now at 1.7 percent for 2011 among the pundits (Ivory Tower economists) – down from more than 3 percent at the start of the year and 2.5 percent only in July – there is major mean-reversion in economic projections, now the market is probably too low relative to where we end up.
- Limited risk: You are probably wrong if S&P cash trades two days below 1080/1090 on a closing basis.
- The always bullish analysts appear to be all turning bearish
- Lack of understanding from Anglo-Saxons on the true dilemma in Europe (The political will to do whatever needed in the last minute modus operandi of European history)
- Relatively higher consumer spending in my favourite leading indicator: http://www.consumerindexes.com/
- Growth forecast now at 1.7 percent for 2011 among the pundits (Ivory Tower economists) – down from more than 3 percent at the start of the year and 2.5 percent only in July – there is major mean-reversion in economic projections, now the market is probably too low relative to where we end up.
- Limited risk: You are probably wrong if S&P cash trades two days below 1080/1090 on a closing basis.
New low in EU commitments
It’s hard not to laugh, again, when reading the recent goals produced by every single player in the EU debt crisis, but there are emerging signs of a "Mexican stand-off" and this week was certainly a new low in commitments and solidarity in Europe.
It’s hard not to laugh, again, when reading the recent goals produced by every single player in the EU debt crisis, but there are emerging signs of a "Mexican stand-off" and this week was certainly a new low in commitments and solidarity in Europe.
This week I read three excellent pieces on the EU which gave me
plenty to think about. In particular the paper from Daniel Gros and
Thomas Mayer should be a must read as they are outlining what I
increasingly think will be the compromise in this standoff:
- CEPS Commentary - August 2011: What to do when the euro crisis reaches the core, Daniel Gros, Thomas Mayers: Euro crisis reaches the core.
They come up with a solution which seems in line with Maastricht and
which creates a European Monetary Fund with the European Central Bank as
a lender-of-last-resort. Extremely interesting and insightful.
- Spiegel Online: Dutch Finance Minister on the debt crisis:“We are all threatened by contagion” –
key paragraphs: “…Should the Greek government not be in a position to
fulfill the terms of the bail-out programme, then the Netherlands will
refuse to provide any further aid”. Talking about the Finland Clause
(Finland getting collateral reference): “As far as we are concerned, no
deal has been made” – then he – after this interview moved on to state:
“The only thing that helps is for everyone involved to practice verbal
discipline”.
- Deutsche Bundesbank, Monthly Report, August 2011:
The comment in this report clearly shows the Bundesbank’s reservation
for what’s going on: “With the sovereign debt crisis spreading to other
euro-area member states, the Governing Council also reactivated its
Securities Markets Programme (SMP). This would, it argued, help restore
better monetary policy transmission” – and the whole final paragraph is
about how we may need to go to a “worse” place in order to get to a
better place is also a must read:
The recent resolutions transfer sizeable additional risks to the countries providing assistance and their taxpayers, and go a long way towards communitising risks caused by unsound public finances and misguided macroeconomic policies in individual euro-area countries. This weakens the foundations of monetary union, which is based on the principles of national fiscal responsibility and the disciplining effect of capital markets, without noticeably increasing the influence and control over individual national fiscal policies as a quid pro quo. Overall, there is a risk that the originally agreed institutional framework of the monetary union will increasingly become eroded. While fiscal policy will continue to be determined by democratically elected parliaments at national level, the resultant risks and burdens will increasingly be borne by the Community in general and the financially sound countries in particular, without this being offset by any concrete powers to intervene in the sovereignty of national fiscal policies. No comprehensive change in the European treaties is currently envisaged that would democratically empower a central entity to exert some control
over national budgetary policies. This means there is a danger that the euro-area countries’ propensity to incur debt may increase even further, and the pressure on the euro area’s single monetary policy to adopt an accommodating stance may grow. Unless and until a fundamental change of regime occurs involving an extensive surrender of national fiscal sovereignty, it is imperative that the no bail-out rule that is still enshrined in the treaties and the associated disciplining function of the capital markets be strengthened, and not fatally weakened.
Deutsche Bundesbank Monthly Report, August 2011
I know there's too much reading in this chronicle, but all of it important in my view.
The recent resolutions transfer sizeable additional risks to the countries providing assistance and their taxpayers, and go a long way towards communitising risks caused by unsound public finances and misguided macroeconomic policies in individual euro-area countries. This weakens the foundations of monetary union, which is based on the principles of national fiscal responsibility and the disciplining effect of capital markets, without noticeably increasing the influence and control over individual national fiscal policies as a quid pro quo. Overall, there is a risk that the originally agreed institutional framework of the monetary union will increasingly become eroded. While fiscal policy will continue to be determined by democratically elected parliaments at national level, the resultant risks and burdens will increasingly be borne by the Community in general and the financially sound countries in particular, without this being offset by any concrete powers to intervene in the sovereignty of national fiscal policies. No comprehensive change in the European treaties is currently envisaged that would democratically empower a central entity to exert some control
over national budgetary policies. This means there is a danger that the euro-area countries’ propensity to incur debt may increase even further, and the pressure on the euro area’s single monetary policy to adopt an accommodating stance may grow. Unless and until a fundamental change of regime occurs involving an extensive surrender of national fiscal sovereignty, it is imperative that the no bail-out rule that is still enshrined in the treaties and the associated disciplining function of the capital markets be strengthened, and not fatally weakened.
Deutsche Bundesbank Monthly Report, August 2011
I know there's too much reading in this chronicle, but all of it important in my view.
Keep the powder dry!
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