Posts
September 14, 2012
Yesterday, Fed Chairman Bernanke announced that the Fed would:
1.. Extend the Zero Interest Rate Policy (ZRIP) until mid 2015
2. Continue the $45 billion per month Twist program (to keep long-term interest rates low)
3. Start buying $40 billion per month of Mortgage Backed Securities until employment improves (does that mean in perpetuity?) He will even add more money if the labor market does not improve.
The market has been expecting this for more than a year. The surprise was that the amount to be purchased was open-ended. That is really kicking the can. Chairman Bernanke also revised his GDP growth number down to 1.7-2. from 1.9-2.4. He must be very nervous because he seems to make downward revisions after each meeting.
Where will all this money go? To the banks of course! They will be able to get damaged bonds off their books at a good price and then use the money to beef up their balance sheets by investing the money in stocks and bonds here and abroad. It may not do much for employment but it should be good for the markets, at least for a while. But sooner or later we will have to pay for it with a deeper recession or inflation.
What went up in price on the announcement? For example: Gold, Silver, Equities, and Oil. What went down? For example: Bond prices and the Dollar.
Oh, Paul Krugman, Nobel-Prize winning economist and professor, again, does not think The Fed is spending enough.
Monday, September 24, 2012
Summer Ends and the Volatility Season Begins
August 20, 2012
As the low summer volume is about to end and the aggressive Presidential campaigns start spending their billions in campaign funds begin; we are about to get some serious volatility over the next six months Maybe sudden sharp drops followed by "clarifications" and short-covering, changing and conflicting poll numbers and then more clarifications again and again.
We are facing a number of serious issues between now and the "State of the Union" speech in late January. For example:
1. The overly optimistic, but constantly being revised downward, GDP, revenues, and profit numbers being forecast for the third and fourth quarters,
2. The debate in Europe (or press releases that levitate the markets until the data is fact checked) about how countries with almost no growth and no way to pay the interest on past debt can increase their debt so they can solve their problems (our economy and markets are correlated with Europe),
3. The end of the "Bush" tax cuts on December 31 which if not extended will increase Government revenues but lower revenues and spending by taxpayers and lower GDP,
4. The debt ceiling (again) will have to be increased by October (a guess) or the government will not be able to pay bills its now obligated to pay (and what about the threat of another credit rating downgrade),
5. The Federal Budget (or some temporary agreement to fund the government) needs to be approved by Fiscal year-end September 30. Even though Congress is obligated to do so, we haven't had a budget in four years, just continuing resolutions,
6. The 3% or $4 trillion dollar cuts the budget (Discretionary and Defense) that are suppose to take effect on January 1 that both sides now claim can't be done in this difficult economic environment (is that the same as "Recovery"). Maybe that's why they kicked the ball into 2013 because there is no willingness to cut anything.
7. The 21 new tax increases and many new requirements of ObamaCare that begin in January. Will they be implemented or rescinded by the election?
That's enough to give you the idea that all of these issues, plus the political rhetoric and the daily polls, will make each day a new adventure. Also, since we have moved from an entrepreneurial to a centrally-planned economy over the years, all we can do is react to what the central planners propose and do.
This increase in volatility with no way to predict the market direction on any given day means we have to look at an investment strategy that will protect our capital during this volatile period; and for more aggressive investors, offer ways to capitalize on this volatility. Call your investment advisor and discuss how to get through this upcoming volatile period.
As the low summer volume is about to end and the aggressive Presidential campaigns start spending their billions in campaign funds begin; we are about to get some serious volatility over the next six months Maybe sudden sharp drops followed by "clarifications" and short-covering, changing and conflicting poll numbers and then more clarifications again and again.
We are facing a number of serious issues between now and the "State of the Union" speech in late January. For example:
1. The overly optimistic, but constantly being revised downward, GDP, revenues, and profit numbers being forecast for the third and fourth quarters,
2. The debate in Europe (or press releases that levitate the markets until the data is fact checked) about how countries with almost no growth and no way to pay the interest on past debt can increase their debt so they can solve their problems (our economy and markets are correlated with Europe),
3. The end of the "Bush" tax cuts on December 31 which if not extended will increase Government revenues but lower revenues and spending by taxpayers and lower GDP,
4. The debt ceiling (again) will have to be increased by October (a guess) or the government will not be able to pay bills its now obligated to pay (and what about the threat of another credit rating downgrade),
5. The Federal Budget (or some temporary agreement to fund the government) needs to be approved by Fiscal year-end September 30. Even though Congress is obligated to do so, we haven't had a budget in four years, just continuing resolutions,
6. The 3% or $4 trillion dollar cuts the budget (Discretionary and Defense) that are suppose to take effect on January 1 that both sides now claim can't be done in this difficult economic environment (is that the same as "Recovery"). Maybe that's why they kicked the ball into 2013 because there is no willingness to cut anything.
7. The 21 new tax increases and many new requirements of ObamaCare that begin in January. Will they be implemented or rescinded by the election?
That's enough to give you the idea that all of these issues, plus the political rhetoric and the daily polls, will make each day a new adventure. Also, since we have moved from an entrepreneurial to a centrally-planned economy over the years, all we can do is react to what the central planners propose and do.
This increase in volatility with no way to predict the market direction on any given day means we have to look at an investment strategy that will protect our capital during this volatile period; and for more aggressive investors, offer ways to capitalize on this volatility. Call your investment advisor and discuss how to get through this upcoming volatile period.
The Market May Be Saying the Fed Will Move Next Week
July 25, 2012
It looks like the Fed may be ready to move next week (meeting is July 31-August 1) on a new Quantitative Easing Program or QE3 (translation: money printing.) Jon Hilsenrath of the Wall Street Journal mentioned that the Fed may or may not move at their next meeting as the economy has continued to weaken. This "leak" helped move the market up (but still closed down) in the last half-hour yesterday. Today, comments by Steven Roach and others indicate that the Fed will move at the August 1 meeting.
I have been predicting that the Fed would inject more money into the system for some time. It is the only thing they know how to do and they can't escape their Keynesian thought model. However, I thought they would have acted sooner because we haven't solved the problems that created this recession and both parties want to get re-elected.
I don't know if the Fed will move next week or not. But, what you expect the market to do on learning of QE3; it is doing. From this mornings low, equities have rallied to over 100 points, the dollar is down (printing debases the dollar) and gold is up big (reduced buying power and fear of inflation.)
Will this help? Depending on size and pace of printing, etc., it could levitate the market for a short period of time (weeks to months.) But in the long term, it will not work and in fact make our problem of de-leveraging worse (more painful)
It looks like the Fed may be ready to move next week (meeting is July 31-August 1) on a new Quantitative Easing Program or QE3 (translation: money printing.) Jon Hilsenrath of the Wall Street Journal mentioned that the Fed may or may not move at their next meeting as the economy has continued to weaken. This "leak" helped move the market up (but still closed down) in the last half-hour yesterday. Today, comments by Steven Roach and others indicate that the Fed will move at the August 1 meeting.
I have been predicting that the Fed would inject more money into the system for some time. It is the only thing they know how to do and they can't escape their Keynesian thought model. However, I thought they would have acted sooner because we haven't solved the problems that created this recession and both parties want to get re-elected.
I don't know if the Fed will move next week or not. But, what you expect the market to do on learning of QE3; it is doing. From this mornings low, equities have rallied to over 100 points, the dollar is down (printing debases the dollar) and gold is up big (reduced buying power and fear of inflation.)
Will this help? Depending on size and pace of printing, etc., it could levitate the market for a short period of time (weeks to months.) But in the long term, it will not work and in fact make our problem of de-leveraging worse (more painful)
Thursday, July 19, 2012
Show Me The Money!
July, 19, 2012
According to Chairman Bernanke’s testimony in Congress the other day, he said he is concerned by two major events: The Fiscal Cliff on January 1, 2013 (expiration of the Bush tax cuts and the imposition of new taxes in the health insurance program) and the deteriorating situation in Europe. Oh yea, the economy is “growing” too slowly and employment levels are unacceptable. Also, that the Federal Reserve stands ready to add additional “accommodation” if necessary.
Here is the translation: without more money from the government, the economy is headed back into recession. Why?
1. We have not solved the problems associated with the b bursting of the financial bubble (bank, housing, consumer debt, etc.)
2. The “solution” (increasing the money supply) we have taken has made matters worse.
Yes. But the method and timing are uncertain. In the meantime, we are left with letting the economy slide back into recession (enabling the problems solve themselves) and accepting the pain that goes with it OR adding more paper money and trying to kick the can a little farter down the road. My guess is that the politicians will, when they begin to feel the pain of reelection, show us the money.
It is theoretically possible to get a politician to define and articulate a strategy to get our economy back to reality in X number of years. But, if that politician doesn’t show up soon, we will eventually be left with two options: default or very high inflation.
Our economy and markets are now unfortunately left to the whims of politicians which mean we have to think differently and adjust our strategies to match reality.
According to Chairman Bernanke’s testimony in Congress the other day, he said he is concerned by two major events: The Fiscal Cliff on January 1, 2013 (expiration of the Bush tax cuts and the imposition of new taxes in the health insurance program) and the deteriorating situation in Europe. Oh yea, the economy is “growing” too slowly and employment levels are unacceptable. Also, that the Federal Reserve stands ready to add additional “accommodation” if necessary.
2. The “solution” (increasing the money supply) we have taken has made matters worse.
- Stimulus wasted
- QE1, QE2, Twist, Zero interest rate policy, etc. causing mal-investment
- Chronic, excessive spending at over $1 trillion per year
- Regulations that don’t make sense and are undefined
- We haven’t even discussed current mal-investments (other bubbles) like education, free healthcare, bloated government and financial system.)
- We have added, in sovereign debt alone, $9 trillion (nine thousand billion dollars) and we can not even cut one billion from our spending.)
- Our debt is now (before next year’s budget and a new higher debt limit) at 102% of our GDP. That of course is before corporate debt, consumer debt, state and municipal debt, etc.)
- Even more troubling is that our sovereign debt is now at 10% of our revenues (taxes) and 10% is the line that determines risk and no risk. And that’s at our current low interest rates. Therefore, going forward, by definition, U.S. Treasuries will no longer be “risk free;” and you can see what’s happening in Europe.
Three Big Events Coming In The Next Two Weeks
June 14, 2012
Everyone knows we have lots of headwinds facing the U.S. and the global economies over the course of this year. But, I wanted to comment on three events that could move the markets in the next two weeks.
First is the Greek election on Sunday, the 17th.
The conventional story is that if the far left party, headed by SYRIZA, wins, he will negate the "Memorandum of Understanding" that the Greeks made with the EU in order to get their latest bailout money. If that happens, many feel that Greece would have to voluntarily leave the Euro and go back to their old currency which would be very painful in the short term or the EU would have a reason expel Greece from the Euro. The election is too close to call.
From everything I can find it looks like SYRIZA may modify his view to one of re-negotiation rather than simply tearing up the Memorandum. One reason is that a survey says 80% if Greeks want to stay with the Euro; they just don't want the severe austerity that goes with the agreement. Also, Spain just received a promise of a bailout package without the severe austerity demands placed on Greece. Also, a large number of SYRIZA's supporters are government workers and want to keep getting paid.
Therefore, on Monday morning, the S&P500 could open up much higher or much, much lower. And this is not to mention Egypt with the military decree that the last election was illegal.
Second is the decision of the Federal Reserve on Wednesday, the 20th
The country is disproportionally divided on whether the government should inject more money into the system. Keynesians are demanding additional government spending and money printing. Keynesian-Lite's are demanding tax cuts and defense spending paid for with borrowed money. Net, more spending and more printing of money.
The markets appear to be waiting for the Fed announcement which they believe will be for more printing or QE3. Or at the least, more "Operation Twist" for a few months with QE3 coming soon. If the Fed says they are standing pat, it could disappoint. If the Fed's goal is to keep markets stable or prices stable, they need inflation (QE3 which is money going into banks so they can drive up asset prices) to offset the deflation going on in depressed industries.
Therefore, we could have a much higher market or a much lower market on Wednesday.
Third is the Supreme Court Decision on ObamaCare
The Supreme Court usually announces decisions on Monday's in June before they recess for the summer. This means next Monday or the following Monday. The two big issues I think are the mandate that everyone is required to buy health insurance or pay a fine/tax; and if the court will through out the entire 2,000 some page law altogether.
The result will move the market either way.
Everyone knows we have lots of headwinds facing the U.S. and the global economies over the course of this year. But, I wanted to comment on three events that could move the markets in the next two weeks.
First is the Greek election on Sunday, the 17th.
The conventional story is that if the far left party, headed by SYRIZA, wins, he will negate the "Memorandum of Understanding" that the Greeks made with the EU in order to get their latest bailout money. If that happens, many feel that Greece would have to voluntarily leave the Euro and go back to their old currency which would be very painful in the short term or the EU would have a reason expel Greece from the Euro. The election is too close to call.
From everything I can find it looks like SYRIZA may modify his view to one of re-negotiation rather than simply tearing up the Memorandum. One reason is that a survey says 80% if Greeks want to stay with the Euro; they just don't want the severe austerity that goes with the agreement. Also, Spain just received a promise of a bailout package without the severe austerity demands placed on Greece. Also, a large number of SYRIZA's supporters are government workers and want to keep getting paid.
Therefore, on Monday morning, the S&P500 could open up much higher or much, much lower. And this is not to mention Egypt with the military decree that the last election was illegal.
Second is the decision of the Federal Reserve on Wednesday, the 20th
The country is disproportionally divided on whether the government should inject more money into the system. Keynesians are demanding additional government spending and money printing. Keynesian-Lite's are demanding tax cuts and defense spending paid for with borrowed money. Net, more spending and more printing of money.
The markets appear to be waiting for the Fed announcement which they believe will be for more printing or QE3. Or at the least, more "Operation Twist" for a few months with QE3 coming soon. If the Fed says they are standing pat, it could disappoint. If the Fed's goal is to keep markets stable or prices stable, they need inflation (QE3 which is money going into banks so they can drive up asset prices) to offset the deflation going on in depressed industries.
Therefore, we could have a much higher market or a much lower market on Wednesday.
Third is the Supreme Court Decision on ObamaCare
The Supreme Court usually announces decisions on Monday's in June before they recess for the summer. This means next Monday or the following Monday. The two big issues I think are the mandate that everyone is required to buy health insurance or pay a fine/tax; and if the court will through out the entire 2,000 some page law altogether.
The result will move the market either way.
I Am Schocked!
June 6, 2012
European politicians have announced that they have found a way to keep the banquet going for a while longer. Isn't that what politicians are supposed to do: keep kicking the can down the road past the next election?)
They are in the process of putting together a program to refinance Spain's banks through European guaranteed loans. Not recapitalize the banks but get them refinanced. According to the press reports, Germany will agree to this (it can't be done without German guarantees); and Spain will agree because they will not impose an austerity program on them like they forced on Greece.
When is this supposed to happen? After the banks are audited, they expect a package ready by the beginning of July. Will this actually happen? Who knows but there is great pressure on Germany, even Tim Geithner is telling Europe to do something (and it not to pay taxes.) Also, for a small kick down the road and more time, the short-term costs to Germany may be less than the long-term costs.
Maybe they can even get help form the U.S. Many Keynesian economists are telling Bernanke to help. Even Steve Liesman of CNBS called for the US to help bail out Europe.
The rhetoric is beginning to change here also from "we're done" to more stimulus and money printing. Isn't that what politicians are suppose to do? Yesterday in the Wall Street Journal, Jon Hilsenrath wrote an article about how the Fed may now be ready to be more accommodative (Federal Reserve information is often leaked through Jon). He indicated it could be a short-term extension of the "Twist" program while they wait for more negative economic news or maybe direct purchase of bonds. Timing could be June20 meeting or maybe August depending on how they see the economy performing.
Are you shocked?
Wednesday, May 23, 2012
When Will The Federal Reserve Begin Printing Money?
Not being an insider, I don’t know. However, here are some of the estimates:
1.When the S&P500 gets down to 1150 (currently at 1290) where it was last December.
2.When the 10 year Treasury yield gets down to 1.5% (where it was the last time they intervened.)
3.When we get a series of really bad numbers on the economy (like the Philadelphia Fed report last week.)
4.When Chairman Bernanke “sees” prices decline (i.e., Consumer Price Index) as he fears deflation.
5.When Chairman Bernanks needs to keep the dollar from rising too high (which hurts exports and the recovery) and because he needs to support the Euro to prevent a disaster.
6.When Chairman Bernanke needs to help the European Central Bank flood the financial system with liquidity if/when Greece votes to exit the Euro and austerity.
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