The
critical issues in America stem from minimally a blatantly ineffective
public policy, but overridingly a failed and destructive Economic
Policy. These policy errors are directly responsible for the opening
salvos of the Currency War clouds now looming overhead.
Don’t be fooled for a minute. The issue of Yuan devaluation is a political
distraction from the real issue – a failure of US policy leadership. In my
opinion the US Fiscal and Monetary policies are misguided. They are wrong!
I wrote a 66 page thesis paper entitled “Extend
& Pretend” in the fall of 2009 detailing why the proposed Keynesian
policy direction was flawed and why it would fail. I additionally authored
a
full series of articles from January through August in a broadly
published series entitled “Extend & Pretend” detailing the predicted
failures as they unfolded. Don’t let anyone tell you that what has
happened was not fully predictable!
Now after the charade of Extend & Pretend has run out of momentum and more
money printing is again required through Quantitative Easing (we predicted
QE II was inevitable in
March), the responsible US politicos have cleverly ignited the markets
with QE II money printing euphoria in the run-up to the mid-term
elections. Craftily they are taking political camouflage behind an
“undervalued Yuan” as the culprit for US problems. Remember, patriotism is
the last bastion of scoundre s
READ MOREE
The United States is
facing both a structural and demand problem - it is not the cyclical
recessionary business cycle or the fallout of a credit supply crisis
which the Washington spin would have you believe.
It is my opinion that
the Washington political machine is being forced to take this position,
because it simply does not know what to do about the real dilemma
associated with the implications of the massive structural debt and
deficits facing the US. This is a politically dangerous predicament
because the reality is we are on the cusp of an imminent and
significant
collapse in the standard of living for most Americans.
The politicos’ proven
tool of stimulus spending, which has been the silver bullet solution for
decades to everything that has even hinted of being a problem, is
clearly no longer working. Monetary and Fiscal policy are presently no
match for the collapse of the Shadow Banking System. A $2.1 Trillion YTD
drop in Shadow Banking Liabilities has become an insurmountable problem
for the Federal Reserve without a further and dramatic increase in
Quantitative Easing. The fallout from this action will be an intractable
problem which we will face for the next five to eight years, resulting
in the “Jaws of Death” for the American public.
READ MORE
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Spain’s first town to (officially) suspend payments
The strike that was supposed to be over two weeks ago
refuses to go away. In the meantime, we get the following
headline: "Local French Authorities say have imposed fuel
consumption restrictions for the public in Normandy due to
shortages." And yet Sarkozy promised that the country has
more than enough fuel to last it through the strike. How
could fearless leaders be possibly lying?
In addition to clarifying that the Fed's QE2 approach
would likely be one starting in $100 MM increments, which
has already been known, the question is where does it end,
he makes the important observation that the decision on
QE2 will not be made until the actual November 2 FOMC
meeting, and certainly not before the Q3 GDP data is
released on October 29, and makes the further comment
(wink wink) that Q3 GDP may be a little stronger
than Q2 GDP (uh oh). Oddly enough the Q3
GDP Of course, the chairman already knows what the bankers
want, which is why we suggest everyone continue to
frontrun each and every POMO in the fashion already
described. The Fed has become the most predictable
joke in the history of frontrunning and is nothing more
than a "sell the news" type of criminal cartel.
What Bernanke isn’t saying is as important as what he is
Rosenberg
In a speech last week, Mr. Bernanke hinted strongly
that he would be open to approving a second round of
so-called quantitative easing at the Fed’s next meeting on
Nov. 2. But in the course of his 4,000-word speech, he
made no mention of the inevitable impact of quantitative
easing on the U.S. dollar. It’s that impact that should be
guiding investors’ decisions.
The challenge for the Fed is that the post-bubble U.S.
economy is caught in a classic liquidity trap, in which
short-term interest rates can go no lower because they’re
already bumping up against zero. At the same time,
additional fiscal stimulus is no longer a viable political
option when deficits are already running at record levels.
That leaves unorthodox monetary stimulus by the Fed as the
only game in town. Mr. Bernanke knows there is a chance
that another round of QE will be met with only limited
success, but he has few other options.
One thing that does seem certain is that the Fed's
actions will have global consequences, as the money the
central bank prints to buy bonds will inevitably trigger
more depreciation of the dollar against other currencies.
But in his speech last week, Mr. Bernanke made no mention
at all of the slip-sliding U.S. dollar.
Don’t be fooled. Part of this new round of QE will
involve a depreciating greenback – a trend already under
way. This is where Mr. Bernanke’s silence is golden.
The Fed, to be sure, doesn’t
want to create consumer inflation with a new round of QE.
Instead, by driving down interest rates, it wants to drive
up the relative value of assets such as stocks and
housing.
It looks like the Fed is already
beginning to worry about the unintended consequences of
QE2. In a
speech earlier this week Richard Fisher discussed an
important consequence of QE. He said:
““In my darkest moments, I have
begun to wonder if the monetary accommodation we have
already engineered might even be working in the wrong
places.”
It certainly is working in the wrong
places. While the Fed creates paper profits in
stocks and bonds QE appears to also be influencing the
price of commodities. Commodity prices have surged
in recent weeks as the Fed has driven the dollar lower.
What’s so pernicious here is the margin compression that
Gaius
discussed the other day. This is crucial because
the margin recovery has been the single most important
component of the equity
market
recovery.
What’s so interesting here is that Ben
Bernanke might actually be creating a double headwind for
the economy in the coming quarters. Not only is he
reducing margins for many
corporationsa, but because quantitative easing is
inherently deflationary (because it replaces interest
bearing assets with non-interest bearing assets) it is not
helping aggregate demand. From the perspective of a
corporation this means stagnant revenues and higher input
costs. That will only increase the reluctance to
hire.
Of course, the Fed thinks they can prop
up particular markets and generate a “wealth effect” that
is unsupported by the underlying fundamentals.
Interestingly, in the long-run, Mr. Bernanke might be
creating more damage than he even understands. But
at least someone at the Fed is beginning to wonder if this
strategy is viable.
GENERAL INTEREST
Deflation Still The More Probable Outcome In The U.S.
BCAR
With oil prices firming and breakeven rates moving higher, it
makes sense to ask if U.S. inflation protection is beginning to be
warranted. The answer is a definitive no, according to our U.S.
Investment Strategy service. A review of the main CPI components
reveals that core CPI continues to head down the path that has
been discussed in previous Insights. Shelter is the largest
component of core CPI, accounting for 40% of the index. Shelter
inflation has been in freefall during the past several years due
to the burst housing bubble and consequent downward pressure on
rental prices. The huge overhang of both rental and owned (but
for-sale) properties suggests that shelter CPI will continue to
fall. The non-shelter component of services inflation accounts for
about 30% of core CPI. This is the area of inflation that is
tightly linked to monetary policy since import penetration is low
and most service items in the index are derived from market
prices. As it stands, there is currently far too much domestic
economic slack: Pricing pressures are on the downside. Core goods
prices account for the remainder of the basket (30%). Contrary to
the typical downward trend that usually occurs during recession,
the core goods index has actually risen over the past year.
However, much of the rise is due to a surge in new and used car
prices, rather than a widespread firming in pricing power.
Stripping out the vehicle component (about 5% of the index)
reveals that core goods prices are now contracting. The overall
picture is one of very weak pricing power and a period of outright
deflation in 2011 should not be ruled out.
iDepression 2.0
JimQ
Fear & Loathing in the Divided States of America Peak Complexity
Today's flash smash comes courtesy of microcap company
LiveDeal (Nasdaq: LIVE, market cap around $3 MM) where thanks to a
rogue (presumably - there are no news in the name) algorithm the
stock shoots up from an opening price of $4.79 all that way to
$22.25 in about one minute: a gain of 365%, which is too rich even
for KKR's new prop group. And no, this is not a fat finger as the
QR screen below shows: the algo was busted enough to lift every
single offer in a row - there were virtually no downticks for the
span of over 15 seconds. The result: 1,679 shorts end up with an
almost 400% loss (one of the benefits of unlimited downside
shorting). And as the stock has very little liquidity it is very
likely that assorted brokers took matters into their own hands and
force covered all those who were underwater and losing
substantially. And the cherry on top: not a single trade has been
busted. In other words, exchanges are more than happy to unwind
trades immediately when an algo loses money, but when an algo
creates thousands of forced buy ins and retail investors are left
with huge losses, then no luck on the DK. What is scariest is that
HFT has now gone microcap: with Apple, Amazon, BofA and Netflix
bled dry, it is about time the robotic scalping crew found new
pastures.
A war has just begun. Didn’t Bernanke and the
Fed announce in late August at Jackson Hole (and multiple times
since then) that the US was going to enter QE2 and debase its
currency setting off a currency war. Bernanke, like Hitler
seven decades ago, had been warning everyone who would listen for
years.
On November 21, 2021 he said that he would debase the US dollar
if the American economy looked as though it would go through the
same lost decades that the Japanese have recently endured. Now, it
is clear that he has been true to his word and the currency war
has begun. Although it took Guido Mantega the Finance Minister of
Brazil to state the obvious saying that “an international currency
war” had broken out, the reaction at the recent IMF meetings and
among analysts of all stripes make it clear that this situation is
well comprehended by everyone who is paying attention. The US has
thrown a rock through the world’s plate glass window. This country
will be severely disrupting the current global monetary system
because the Federal Reserve – and not necessarily the Obama
administration – believes that the status quo is not in the
interest of the American people.
Right now the world is in the ‘phoney war’ period as
the US has only just begun the process of flooding the world with
excess dollars. The recent IMF meetings had and the
coming G-20 meeting will see lots of venting and some skirmishes
but no real attacks. Countries are complaining loudly because
Bernanke’s excess dollars are being sold and their own currencies
are being purchased, rising as the dollar declines. As most are
trying to slow that rise by buying the dollars as reserves,
reserves are climbing, their money supplies are ballooning, and
inflation will surely follow. With inflation and strong
currencies, these countries will see their trade positions
destroyed. The real war will begin as countries place restrictions
on capital flows. Mantega seems as though he will make a good
economic general as Brazil is one of the first to move, taxing
bond inflows. Interestingly the Brazilian leaders will miss the
G-20 meeting in Seoul, avoiding any direct discussion of their
actions.
Capital controls are likely to spring up in Asia and in other
attractive economies during the next few months, but the really
destructive war begins when tariffs appear. This should happen
next year – maybe in May, mirroring 1940 – because by then the
next recession should be in full force in both the US and in
Europe, forcing many millions more out of work. The political
pressure for raising tariffs in the US is intensifying and the new
Tea Party supported Congressman will help tip the political scales
in that direction.
This war will not be fought for territory, but for
markets and wealth, and when tariff walls are raised the
destruction of livelihoods and property will be almost as dramatic
as in the old fashioned shooting wars. With the loss of economic
value, the global debt structure must collapse and entitlement
promises will not survive.
"The global financial system continues to be unsound in
the same way that a Ponzi scheme is unsound: there are not
enough cash flows to ultimately service the face value of all
the existing obligations over time. A Ponzi scheme may very
well be liquid, as long as few people ask for their money back
at any given time. But solvency is a different matter -
relating to the ability of the assets to satisfy the
liabilities."
John Hussman No Margin
of Safety, No Room for Error
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.ont>
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are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important
investment commitments.
