John Hussman On Our Fed-Inspired Bubble,
by ilene - November 8th, 2010 9:11 am
John Hussman On Our Fed-Inspired Bubble, Crash, Bubble, Crash, Bubble (etc) Reality
Courtesy of Tyler Durden
Written by John Hussman of Hussman Funds
Bubble, Crash, Bubble, Crash, Bubble…
"Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."
Federal Reserve Chairman Ben Bernanke, Washington Post 11/4/2010
Last week, the Federal Reserve confirmed its intention to engage in a second round of "quantitative easing" – purchasing about $600 billion of U.S. Treasury debt over the coming months, in addition to about $250 billion that it already planned to purchase to replace various Fannie Mae and Freddie Mac securities as they mature.
While the announcement of QE2 itself was met with a rather mixed market reaction on Wednesday, the markets launched into a speculative rampage in response to an Op-Ed piece by Bernanke that was published Thursday morning in the Washington Post. In it, Bernanke suggested that QE2 would help the economy essentially by propping up the stock market, corporate bonds, and other types of risky securities, resulting in a "virtuous circle" of economic activity. Conspicuously absent was any suggestion that the banking system was even an object of the Fed’s policy at all. Indeed, Bernanke observed "Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits."
Given that interest rates are already quite depressed, Bernanke seems to be grasping at straws in justifying QE2 on the basis further slight reductions in yields. As for Bernanke’s case for creating wealth effects via the stock market, one might look at this logic and conclude that while it may or may not be valid, the argument is at least the subject of reasonable debate. But that would not be true. Rather, these are undoubtedly among the most ignorant…
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A CASE STUDY ON THE FED’S PERMANENT OPEN MARKET OPERATIONS
by ilene - October 25th, 2010 7:01 pm
A CASE STUDY ON THE FED’S PERMANENT OPEN MARKET OPERATIONS
Courtesy of The Pragmatic Capitalist
On Friday I posted a story highlighting the market’s outperformance when the Fed performs its Permanent Open Market Operations (POMO). POMO is nothing new for the Fed so a one month data set is really nothing more than datamining. If we look back at the data over the course of the last 5 years we obtain a much more realistic (and potentially disturbing) perspective of the market’s performance on days when the Fed performs its POMOs.
Since October 2005 there have been 205 operations. On the day the operation was performed the market finished negative 41% of the time, positive 53% of the time and finished flat 6% of the time. The total return on these days was +27.28%. This is equivalent to a +48.6% annualized gain. A look under the hood provides a more useful perspective on the data, however.
Of the days that were positive 63% of the total gains occurred on just 3 days in March 2009. If we remove these three days the total gains equal +9.98%. This is equivalent to a +18% annualized gain. If we remove the best AND worst three days from the set the total return surges to 18.1% or a 33.1% annualized gain.
Perhaps the most interesting perspective in all of this is just looking at the market’s long-term performance when the Fed is conducting these operations. As you can see below the market has performed dramatically different when the Fed is conducting POMO’s. The Fed ceased POMO’s in May of 2007 after a fairly steady schedule. The market declined almost 20% in the following year and a half. They did not initiate the program again until September of 2008 when the economy was melting down. Technically, the program began on September 19th 2008 just days before the Lehman crash. This skews the beginning point of the credit crisis set of operations enormously. If we take that exact starting point the market fell -2% between then and the last operation on March 24th 2010. Of course, one could easily argue that the September 2008 operations were largely useless as the market was already in meltdown mode.
Between March 24th and August 17th of 2010 when the program was halted the market declined -6.5%. Since restarting the program in August the market has risen 8.3%.
…
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DAVID ROSENBERG ATTACKS THE FED’S INTENTIONAL PONZI APPROACH
by ilene - October 5th, 2010 11:06 pm
DAVID ROSENBERG ATTACKS THE FED’S INTENTIONAL PONZI APPROACH
Courtesy of The Pragmatic Capitalist
This weekend’s shocking admittal that the Fed is hoping QE will keep
Brian Sack, a senior official at the New York Fed, had this to say about the powers of quantitative easing in a speech he just delivered:
“Some observers have argued that balance sheet changes, even if they influence longer-term interest rates, will not affect the economy because the transmission mechanism is broken. This point is overstated in my view. It is true that certain aspects of the transmission mechanism are clogged because of the credit constraints facing some households and businesses, and it is true that monetary policy cannot directly target those parties that are the most constrained. Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be. It seems highly unlikely that the economy is completely insensitive to borrowing costs and wealth, or to other changes in broad financial conditions. ”
I just love that one comment to the effect that QE “adds to household wealth by keeping asset prices higher than they otherwise would be.” When will these guys ever learn that maybe, just maybe, these Fed policies aimed at targeting asset prices at levels above their intrinsic values is probably not in the best interests of the nation? As our friend Marc Faber likes to say, the “Bernanke put” is cut from the same cloth as the fabled “Greenspan put” — only the strike price is different.
Imagine running a policy aimed at getting people to spend money based on an artificial level of asset values — what an admission. Then again, this is what the Fed has been all about since the LTCM bailout of 1998. We’re still not convinced after reading this sermon that this next “pull-another-rabbit-out-of-the-hat” experiment is going to end with very much success. There is something to be said about paying for our mistakes and to have the Fed try to rekindle an asset-based economy that has only ended up in generating a series of burst bubbles over the last 12 years, not to mention encourage a lifestyle of living beyond our means,
…
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Market Still Deluding Itself That It Can Escape The Inevitable Dénouement
by ilene - September 13th, 2010 9:09 pm
Market Still Deluding Itself That It Can Escape The Inevitable Dénouement
Courtesy of John Mauldin, Outside the Box
One of my favorite analysts is Albert Edwards of Societe Generale in London. Acerbic, witty and brilliant. Emphasis on brilliant. The fact that he is a Doppelganger for James Montier (who long time readers are well acquainted with) is a coincidence (or he would say vice versa). I only kind of have permission to forward this note to you, but better to ask forgiveness… So, this week he is our Outside the Box. And a short but good one he is.
I am in Amsterdam and it is late, but deadlines have no time line. Tomorrow more work on the book. It is getting close to the end. Most books are finished when the authors quit in disgust. How many edits can you do? I am close.
I wonder late at night, with maybe a few too many glasses of wine, why I feel like a book is so much more than an e-letter. Really? The last ten years of what I have written are on the archives. Good (ok, sometimes really good) is there. But some are an embarrassment. What was I thinking?
But somehow in my Old World brain, a book is more than a weekly letter. It is somehow more permanent than an “online” letter. Which may be archived forever. The book is “paper” and may be around for a few years. But the online version is here for a long time.
I know that is stupid. Really I do. But what is a 61 year old mind to do? A strange world we live in.
It is really time to hit the send button. More than you know! The conversation tonight has been too deep!
Your trying to figure out the purpose of life analyst,
John Mauldin
Market still deluding itself that it can escape the inevitable dénouement
By Albert Edwards
The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar…
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IS GOLD GETTING OVERBOUGHT?
by Chart School - September 8th, 2010 9:43 pm
IS GOLD GETTING OVERBOUGHT?
Courtesy of The Pragmatic Capitalist
In a recent piece Nomura Group highlighted some of the more interesting gold ratios with the implication that gold is bumping up against some high historically levels:
Personally, I still believe the “irrational” move in gold is very much alive and will likely find support on any significant weakness. Gold is likely to remain the “go to” asset for investors looking for a hedge to the fear and uncertainty of the current environment. The Euro is being viewed as a faulty fiat currency (incorrectly I believe) and the US dollar is believed to be in long-term disarray due to the actions of the Fed. As long as the de-leveraging cycle persists and the sovereign
Source: Nomura Group
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Alan Greenspan Admits America Is A Crony Capitalist System
by ilene - September 7th, 2010 1:44 pm
Excellent, brief summary of where we stand now, by Tyler at Zero Hedge.
Alan Greenspan Admits America Is A Crony Capitalist System
Courtesy of Tyler Durden
We are not sure what is more amusing: the Masetro’s unwitting (and quite correct) observation that America is now nothing but a crony capitalist country, or his attempt to back out of what he said that so perfectly captures the essence of the failed corporatocracy currently raging in America.
In the following exchange from a DemocracyNow interview, Greenspan is forced to respond to his quote from Age Of Turbulence on the definition of crony capitalism: "When a government’s leaders or businesses routinely seek out private sector individuals or business, and in exchange for political support bestow favors on them, the society is said to be in the grip of crony capitalism. The favors generally take the form of monopoly access to certain markets, preferred access to sales of government assets, and special access to those in power."
Greenspan’s pathetic excuse is that while crony capitalism is a "dominant force" in some other regimes, it is "not the dominant force in this country." Perhaps all those who are fighting with the virtual monopoly granted to certain players, such as Goldman in fixed income trading, and Pimco in government bonds, would beg to differ. So yes, according to the Greenspan definition America is now nothing more than a crony capitalist society, which will only get worse as more and more power is granted to those who are believed to be able to ramp various asset classes, and thus the market in general, higher, because as Greenspan himself pointed out recently, nothing is as important a "driver" to the economy as the stock market: "if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here". In the administration’s pursuit of Dow 36,000 to prove that all is well, America has given up on its core constitutional tenets, and is now nothing better than a dictatorial regime in some far-eastern backwater country.
Fast forward to 44:40 in the clip below (after the jump) to see the exchange.
h/t Geoffrey Batt
Photo: Courtesy of Jr. Deputy Accountant
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THE DETERIORATING MACRO PICTURE
by ilene - August 31st, 2010 3:59 am
THE DETERIORATING MACRO PICTURE
Courtesy of The Pragmatic Capitalist
Over the course of the last 18 months I’ve been adhering to a macro view that can best be summed up as follows:
1) The explosion in private
sector debt (excessive housing borrowing, excessive corporate debt, etc) levels would reveal the private sector as unable to sustain positive economic growth, de-leveraging and deflation would ensue.2) Government intervention would help moderately boost aggregate demand, improve bank balance sheets, improve sentiment, boost asset prices but fail to result in sustained economic recovery as private sector balance
sheet recession persists.3) Extremely depressed estimates and corporate cost cutting would improve margins and generate a moderate earnings rebound, but would come under pressure in 2010 as margin expansion failed to continue at the 2009 rate.
4) The end of government intervention in H2 2010 will reveal severe strains in housing and will reveal the private sector as still very weak and unable to sustain economic growth on its own.
The rebound in assets was surprisingly strong and the ability of corporations to sustain bottom line growth has been truly impressive – far better than I expected. However, I am growing increasingly concerned that the market has priced in overly optimistic earnings sustainability – in other words, estimates and expectations have overshot to the upside.
What we’ve seen over the last few years is not terribly complex in my opinion. The housing boom created what was in essence a massively leveraged household sector. The problems were compounded by the leveraging in the financial sector, however, this was merely a symptom of the real underlying problem and not the cause of the financial crisis (despite what Mr. Bernanke continues to say and do to fix the economy).
As the consumer balance sheet imploded the economy imploded with it. This shocked aggregate demand like we haven’t seen in nearly a century. This resulted in collapsing corporate revenues. The decrease in corporate revenues, due to this decline in aggregate demand, resulted in massive cost cutting and defensive posturing by corporations. This exacerbated the problems as job losses further weakened the consumer balance sheet position. Consumers, like, corporations, got defensive and began cutting expenses and paying down liabilities. Sentiment collapsed and we all know what unfolded in 2008.
The government responded by largely targeting the banking sector based on the belief that fixing the banks would fix Main…
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The capital tsunami is a bigger threat than the nuclear option
by ilene - July 14th, 2010 3:15 pm
The capital tsunami is a bigger threat than the nuclear option
Courtesy of Michael Pettis at China Financial Markets
Since this is another long posting, it might make sense to summarize briefly its two parts. In the first part, expanding on an OpEd piece of mine published by the Wall Street Journal on Monday, I argue that China’s “nuclear option”, which has generated a great deal of nervousness among investors and policy-making circles in the US, is a myth, and what the US should be much more concerned about is its diametric opposite — a tsunami of capital flooding into the country. I try to discuss the economic implications and perhaps the implications for asset prices.
In the second part of this posting I discuss the slowing of the Chinese economy within the context of what I believe to be its stop-go approach to economic policymaking. The one-minute take: I think policymakers will soon be stomping again on the accelerator, although there seems to be a real debate going on about whether this would be the proper policy response.
———
An awful lot of investors and policymakers are frightened by the thought of China’s so-called nuclear option. Beijing, according to this argument, can seriously disrupt the USG bond market by dumping Treasury bonds, and it may even do so, either in retaliation for US protectionist measures or in fear that US fiscal policies will undermine the value of their Treasury bond holdings. Policymakers and investors, in this view, need to be very prepared for just such an eventuality
So worried have many been that last week SAFE even had to come out and calm people down. According to an article in the Financial Times:
China has delivered a qualified vote of confidence in the dollar and US financial markets, ruling out the “nuclear option” of dumping its huge holdings of US government debt accumulated over the last decade.
But the State Administration of Foreign Exchange, which administers China’s $2450bn in reserves, the largest in the world, also called on Washington and other governments to pursue “responsible” economic policies. The statement on Wednesday, one of a series that Safe has issued in recent days in an apparent effort to address criticism about its lack of transparency, also played down the chances of China making major further investments in gold.
It’s good that SAFE is trying to soothe worried investors and policymakers, although, as I have pointed…
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What Bond Bubble?
by ilene - July 7th, 2010 12:16 pm
What Bond Bubble?
Courtesy of Rom Badilla of Bondsquawk.com
Interest rates have rallied tremendously in recent months as concerns of an economic slowdown and the potential for a double dip weigh on the minds of both Wall Street and Main Street. Since early April, which marks the recent high in rates, the long-end of the curve has rallied significantly. The yield on the 10-Year U.S. Treasury has declined more than 100 basis points to 2.97 percent during that time frame.
That type of change usually takes many months, if not years, to accomplish. The average implied volatility of both interest rate swaptions and options on Treasuries over the last 10 years is around 100-120 basis points on an annualized basis. Hence, the move to where we are now is quite significant.
Admittedly, part of the decline is attributed to a flight to quality due to fears of contagion from Greece and the European debt crisis. However, the last leg of the drop in yields was due to signs of a slowing economy and declining price pressures. If it were a continuation of the flight-to-quality trade, we would have seen the dollar appreciate as was the case earlier when the Euro approached parity as sovereign risk escalated. Lately with the recent string of weak domestic economic data, the dollar has declined 1.7 percent from June 21 while the 10-Year rallied 26 basis points and pushed below 3 percent.
If there’s any argument that there is a bond bubble, keep in mind that there needs to be an imbalance, i.e. a shift in outlook toward lower rates. Basically, the majority of the world needs to be on one side of the boat, where tipping over is a possibility and the imbalance is ultimately rectified. Right now, we are far from that.
According to Bloomberg’s economic and interest rate survey, market participants still expect higher rates to materialize with the Federal Reserve raising rates in early 2011. In additions, forecasters expect the 10-Year to increase 40 basis points to 3.37 percent by the end of the Third Quarter.
Bloomberg Economic Forecasts
Rate hawks and bond vigilantes are still advocating for higher rates as the U.S. grapples with both perceived higher inflationary expectations fueled by future economic growth and higher fiscal deficits. To be honest, after packing on the calories by downing countless hotdogs and…
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The Shanghai market isn’t really predicting anything
by ilene - June 2nd, 2010 2:00 am
The Shanghai market isn’t really predicting anything
Courtesy of Michael Pettis
It has not been a good year for the Shanghai stock market. Since its closing peak at 6092 in October 2007, the closing high in the past year or so on Shanghai’s SSE composite was 3471, on August 4 last year. Since then the market has been pretty bleak. The SSE Composite finished 2009 by dropping nearly 6% from that high, to close at 3277.
This year things got only worse. By May 20 the market had dropped a further 22% to close at 2556, and then bounced around for the past ten days closing yesterday at 2568. In my May 12 blog entry, I finished the piece by saying “Last Friday the SSE Composite closed at 2688. I bet it is much higher by the end of the summer.”
Obviously my timing was off. Within a week of my prediction the market had managed to lose another 132 points. I still believe that the market will be higher by the end of this summer, and that within weeks we will see moves by the regulators to prop it up. With all the liquidity sloshing around, all we need is a reasonable period off stability before the market comes roaring back, I suspect.
So am I predicting a strong economy? Not really. It is tempting to read falling stock prices as an indication that Chinese investors believe that the economy is poised to slow dramatically, and if the market surges, that Chinese growth is back, but we should be very cautious about how we interpret the meaning of the gyrations in Chinese stocks.
We’re used to thinking about stock markets as expected-cash-flow discounting machines, and we assume that stock price levels generally represent the market’s best estimate of future growth prospects, but this is not always the case, and it is certainly not the case in China. I am often asked to comment on big price moves on the Chinese stock markets and what they mean about growth expectations, but I usually try to caution people from reading too much meaning into the market.
Three investment strategies
To see why, it is probably useful to understand how investors make trading decisions. This blog entry is going to be a pretty abstract piece on how I think about the underlying dynamics of a well-functioning capital market, and how these…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site