There is an obsession in the marketplace over the date when the Fed will once again begin to raise rates. As if another 25 basis points is going to change the economics on tens of trillions of dollars of investments. But as we reflect on the issue more deeply, it becomes obvious that a minor bump in the fed funds rate will indeed change a great deal of economics all over the world.
No, it won’t do much to the cap rate on your latest real estate purchase, but it is likely to greatly affect the pricing of the currency and commodity markets. And those markets will affect corporate profits, which will affect the stock market. It’s all connected.
And what if the Fed has lost control? What if they are in a no-win situation where raising rates will cause reactions they don’t want, but not raising rates will result in equally unpleasant reactions?
A big part of the problem lies in what we analysts call divergent and convergent monetary policies. With Japan mounting an unprecedented quantitative easing attack on currencies everywhere and Europe getting ready to join in, with smaller nations all over the world lowering their interest rates, if the US were to raise rates, that move would strengthen the dollar even more. But that would mean even more deflation imported into the US.
Today we find that the headline CPI was -0.7% for January, coming on the heels of two previous months at -0.3%. The year-over-year rate slipped into negative numbers for the first time since October 2009, when we were still reeling from a deep recession.
The Fed typically raises rates when it wants to lean into inflation, not when inflation is falling. Yes, I know that Yellen in her testimony and in recent Fed releases has said the Fed is confident that inflation will once again rise to 2%. And that, even if you take out food and energy, inflation has still risen at 1.6% over the last 12 months.
I want to thank Joan McCullough for allowing me to use the essay she wrote yesterday morning, which is the single best description of the dilemma…
Chris Kimble's chart for KOL shows a recently beaten down ETF struggling to pull itself up from the ashes. As the chart shows, KOL has recently drifted down to levels not seen since the financial crisis of 2008-9.
Bouncing or recovering with energy in general, coal prices appear to have stabilized in the short-term. Reflecting coal prices, KOL has traded between $13.45 and $19.75 during the past year. Bouncing from lows, KOL traded around 2% higher yesterday from $14.26 to $14.48 on high volume. It traded another 3.6% higher in after hours to $15, possibly related to Obama's veto of the Keystone XL bill allowing construction of the Keystone XL oil pipeline. KOL's back to around $14.56 now.
The chart below is of the NYMEX Central Appalachian coal futures near-month contract final settlement price history from Jan. 2008 to Dec. 2014. After running up rapidly in early 2008, coal prices fell quickly during the financial crisis. Coal traded in a narrower range since the 2008 spike. KOL's prices have behaved similarly. (Source.)
Chris's chart analysis suggests that KOL might be ready to stage a breakout to higher levels. Chris likes buying KOL with a stop loss at about $13.87.
For an in-depth analysis of the coal industry, Market Realist provides A must-know overview of the US thermal coal industry for investors. The Realist notes, "There are six main publicly traded companies that operate coal mines in the U.S., which are also part of the Market Vectors Coal ETF (KOL). These are Arch Coal (ACI), Alpha Natural Resource (ANR), Peabody Energy Corporation (BTU), Cloud Peak Energy (CLD), Consol Energy (CNX), and Walter Energy, Inc. (WLT), in order of production. In 2013, the top four publicly traded companies’ U.S. assets made up about a half of the U.S.’ annual coal supply." KOL's top holdings are listed here.
Growing your wealth isn't just about making money in the stock market. In 2015, Philstockworld.com will focus on wealth-building techniques which, combined with our winning investing strategies, can help put you on the path to a life of financial independence.
We do not have to look to Greece to find massively underfunded obligations. Here in the US we can find hundreds of examples, willingly created by politicians and businessmen who proclaim they are working for the public good. We call them pension funds, but they’re just another form of unfunded debt. A sovereign bond is a promise to pay a certain amount of money over time. A defined-benefit pension fund is a promise to pay a certain amount of income over time. The value of either is determined by the ability of the government or the pension fund (or its sponsor) to pay.
I am in the Cayman Islands as I write this letter, to speak at an alternative investment conference attended by the management of some of the largest pension funds in the US and Europe, both public and private. Being here has motivated me to write this week’s letter on the problems that pension funds face. The pension fund managers I have talked with take their fiduciary obligations seriously, and they face some serious challenges.
I was on the stage with Nouriel Roubini (who makes me come off as the optimist), and we were talking about macroeconomic risks. I was asked what other sorts of risks people should be thinking about, and I cited a recent report about how pension fund obligations had dramatically increased because of a small change in mortality tables.
There has been a very steady increase in life expectancy over the last almost 100 years. It is a fairly well-defined trend. The actuarial accountants whose responsibility it is to track these things updated the life expectancy tables for a 65-year-old male, who can now expect to live an additional 21.6 years, two years longer than in the old table.
This trend toward longevity is very well established and is likely to accelerate as new technologies and medicines become available, which means that underfunded pension plans are even more underfunded than we think. [See yesterday's post: How Silicon Valley is
I want to start this paper by reiterating a few of my strongly held convictions about the role of central bankers:
Economics is a branch of logic, itself a branch of philosophy, and not a branch of astrology (the good case) or mathematics (the bad case).
So when I see the guardians of the Temple of Mammon—otherwise known as central bankers—following an illogical policy, I am mesmerized. I start to have doubts, either about my ability to follow a path of logical reasoning, or about the sanity of the current breed of central bankers. As far as the first option goes, our readers can decide, and the market will be the ultimate judge. As for the second, allow me to make a few remarks…
Four basic postulates for central bankers
To think ‘logically’ one generally starts with a few postulates learnt from experience. What should these postulates be for central bankers?
I expect central bankers to know that the future is unknowable. This has been generally accepted wisdom at least since the time of the New Testament: “But of that day and hour knoweth no man.”
Since Karl Popper, central bankers should know that the amount of risk in a system is roughly constant over time and that any effort to minimize risk or volatility at any point in time (usually just before an election) will lead to its more forceful re-emergence later on (hopefully after the election). In this sense an economic system is much like one of Alexander Calder’s mobiles: if you restrict the motion of one of its branches, any disturbance of the system will lead to much bigger movements elsewhere.
Since Knut Wicksell, central bankers should know that the greater the difference between the ‘natural’ interest rate and the ‘market’ rate, the bigger the subsequent booms and busts. If sustained, a false price for the cost of money increases the risk in a system exponentially. A false price for interest rates leads to a false price for the exchange rate. From there all prices become false and the economy moves ex-growth,
In today’s Outside the Box, good friend Ben Hunt informs us that we have entered the cult phase of the Golden Age of the Central Banker:
We pray for extraordinary monetary policy accommodation as a sign of our Central Bankers’ love, not because we think the policy will do much of anything to solve our real-world economic problems, but because their favor gives us confidence to stay in the market. I mean, does anyone really think that the problem with the Italian economy is that interest rates aren’t low enough? Gosh, if only ECB intervention could get the Italian 10-yr bond down to 1.75% from the current 1.85%, why then we’d be off to the races! Really? But God forbid that Mario Draghi doesn’t (finally) put his money where his mouth is and announce a trillion euro sovereign debt purchase plan. That would be a disaster, says Mr. Market. Why? Not because the absence of a debt purchase plan would be terrible for the real economy. That’s not a big deal one way or another. It would be a disaster because it would mean that the Central Bank gods are no longer responding to our prayers.
But, he points out, the cult phase of any human society is a stable phase in the sense that, while change may happen, it will not happen from within:
There is such an unwavering faith in Central Bank control over market outcomes, such a universal assumption of god-like omnipotence within this realm, that any internal market shock is going to be willed away.
However, there is a minor catch: external market risk factors are all screaming red.
I’ve been doing this for a long time, and I can’t remember a time when there was such a gulf between the environmental or exogenous risks to the market and the internal or behavioral dynamics of the market. The market today is Wile E. Coyote wearing his latest purchase from the Acme Company – a miraculous bat-wing costume that prevents the usual plunge into the canyon below by sheer dint of will.
“Below the thunders of the upper deep,
Far far beneath in the abysmal sea,
His ancient, dreamless, uninvaded sleep
The Kraken sleepeth: faintest sunlights flee….
“There hath he lain for ages, and will lie
Battening upon huge sea-worms in his sleep,
Until the latter fire shall heat the deep;
Then once by man and angels to be seen,
In roaring he shall rise and on the surface die.”
"The exact contrary of what is generally believed is often the truth."
– Jean De La Bruyère
“Cry ‘Havoc!’ And let slip the dogs of war!”
– William Shakespeare, Julius Caesar, Act III, Scene I
– Roberto Duran to the referee at the end of his fight with Sugar Ray Leonard, 1980
If you want evidence that central bankers play by their own rules, regardless of what they say or what conventional wisdom tells us, last week’s action by the Swiss National Bank should pretty much fill the bill. My friend Anatole Kaletsky, in a CNBC interview not long after the announcement, quipped (with a completely straight face) that just as James Bond has a license to kill, central bankers have a license to lie.
Swiss National Bank Chairman Thomas Jordan had assured us just the week before that the Swiss would continue to “hold the peg” whereby the SNB kept the value of the Swiss franc from rising higher than €1.22. “The cap is absolutely central,” he said. And SNB Vice Chairman Jean-Pierre Danthine said publicly only last Monday that the peg would remain a cornerstone of Swiss banking policy.
Early Thursday morning the Swiss abandoned that policy. Much of the press coverage in the (largish) wake of their surprise move has focused on the costs to banks and hedge funds around the world, but you have to realize that serious pain is being felt in Switzerland itself. Every bank and business that held non-Swiss-franc debt or investments took an immediate 15–20%+ haircut on its…
The headlines this morning talk about the US dollar hitting an 11-year high. I have been saying for years that the dollar is going to go higher than anyone can imagine. This trade is just in the early innings. And the repercussions will be dramatic, not only for emerging markets that have financed projects in dollars, but also for commodities and energy, gold, and a variety of other investments. The world is at the doorstep of a new era of volatility and currency wars.
In this week’s letter, my associate Worth Wray explores what a rising dollar means for emerging markets and what central banks are likely to do in response. Can they smooth the ride, or will it be the world’s scariest roller coaster? This letter will print long because of the number of fabulous charts Worth provides. I might make a brief comment or two at the end. Here’s Worth.
On the Verge of a Disaster… or a Miracle
By Worth Wray
Twenty years after the first divergence-induced currency crisis of the 1990s, commodity prices are tumbling, the US dollar is rallying, and externally fragile emerging markets are reliving the horrors of their not-so-distant past. Except, this time, major economies like the United States, the United Kingdom, the Eurozone, Japan, and the People’s Republic of China may not be able to side-step the ensuing contagion.
With 2014 now behind us, I want to focus this week's letter on what may prove to be the most important global macro pressure points in the coming year(s):
The growing divergence among the world’s most important central banks
The ongoing collapse in oil and other commodity prices as a function of excess supply and/or weakening global demand
The rise of the US dollar, driven by divergence and risk aversion… and the squeeze it’s putting on the multi-trillion-dollar carry trade into emerging markets
The vicious slide in emerging-market currencies
The rising risk of 1990s-style contagion and financial shocks
And what, if anything, can avert the next global financial crisis
I can’t prove it scientifically, but I’m pretty sure the years are flying by faster now than ever before. [Actually I think it is scientifically proven that time goes faster as we get older... Sorry.] Is everyone just so busy that the passage of time is occurring while we stare at our phones? Or are the events that shape each year simply playing out faster, from start to finish, because of the increased pace of modern life?
More importantly, will 2015 move even faster? [Yes.]
I don’t know the answers, but you’ve already heard enough from me this year anyway (I’ve heard enough from me too!). So for today’s look back on the lessons of 2014, I got a little help from my friends!
Happy New Year and thanks for reading! See you on the other side. – Josh
In 2014 I Learned That…
Aron Pinson (Microfundy): rates don’t necessarily rise in a rising rate environment.
Justin Paterno (StockTwits): if the US economy were a football team it would have the personnel of the Patriots with the fans of the Jets.
Justin Frankel (RiverPark Funds): beating your benchmark isn’t the key to happiness or success, but it’s a fine place to start!
Morgan Housel (Motley Fool): Unsustainable things can last years, even decades, longer than people think.
Tom Brakke (Research Puzzle): A heavily-analyzed, globally-traded commodity can go down fifty percent in response to relatively modest changes in fundamentals. Therefore, you might want to take the predictions you hear and the models you rely upon with a grain truckload of salt.
Stephen Weiss (Short Hills Capital): terrorists don’t respect copyright or trademark laws as Isis Pharmaceuticals found out. [Ha ha - is ISIS going to change its name?]
Must See: Phil visits with Money Talk's Kim Parlee on Business News Network. In this great interview, Phil talks about his target price range for oil and presents an options trade idea that he is calling the "Trade of 2015."
The market has had nearly two months in which to frontrun the preannounced ECB QE, and as DB summarizes "record European equity inflows this year ($30bn) have been driven by both domestic and foreign investors."
And this is what record central bank frontrunning - with Draghi not yet even lifting a finger to buy bonds (which as we reported last week may not even be there) looks like:
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Today the Institute for Supply Management published its monthly Manufacturing Report for February. The latest headline PMI was 52.9 percent, a decline from the previous month's 53.5 percent and below the Investing.com forecast of 53.0. This was the lowest PMI since January 2014, thirteen months ago.
Here is the key analysis from the report:
"The February PMI® registered 52.9 percent, a decrease of 0.6 percentage point from January’s reading of 53.5 percent. The New Orders Index registered 52.5 percent, a decrease of 0.4 percentage point from the reading of 52.9 percent in January. The Production Index registered 53.7 percent, 2.8 percentage points below the January reading of 56.5 percent. The Employme...
Chris Kimble's chart for KOL shows a recently beaten down ETF struggling to pull itself up from the ashes. As the chart shows, KOL has recently drifted down to levels not seen since the financial crisis of 2008-9.
Bouncing or recovering with energy in general, coal prices appear to have stabilized in the short-term. Reflecting coal prices, KOL has traded between $13.45 and $19.75 during the past year. Bouncing from lows, KOL traded around 2% higher yesterday from $14.26 to $14.48 on high volume. It traded another 3.6% higher in after hours to $15, possibly related to ...
Stocks are hitting new highs across the board, even though earnings reports have been somewhat disappointing. Actually, to be more precise, Q4 results have been pretty good, but it is forward guidance that has been cautious and/or cloudy as sales into overseas markets are expected to suffer due to strength in the US dollar. Healthcare and Telecom have put in the best results overall, while of course Energy has been the weakling. Still, overall year-over-year earnings growth for the S&P 500 during 2015 is expected to be about +8%.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 cha...
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PSW Members - well, what a year for biotechs! The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down! The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months. What could go wrong?
Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.
Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies. A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...
Stocks got off to a rocky start on the first trading day in December, with the S&P 500 Index slipping just below 2050 on Monday. Based on one large bullish SPX options trade executed on Wednesday, however, such price action is not likely to break the trend of strong gains observed in the benchmark index since mid-October. It looks like one options market participant purchased 25,000 of the 31Dec’14 2105/2115 call spreads at a net premium of $2.70 each. The trade cost $6.75mm to put on, and represents the maximum potential loss on the position should the 2105 calls expire worthless at the end of December. The call spread could reap profits of as much as $7.30 per spread, or $18.25mm, in the event that the SPX ends the year above 2115. The index would need to rally 2.0% over the current level...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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