Monetary Policy

Wealth Inequality: My thoughts for a friend ...

Here are some interesting quotes and thoughts compiled by The Liberty Beacon on the 99th Anniversary of the Federal Reserve.

Income and wealth inequality have always been, and always will be, a subject of intense debate. I think the roots of the debate come down to two sides of one basic idea: entitlement mentality.

I could speak to that idea in great depth. But I won't so much today. Rather, I want to speak towards a perceived cause, as well as what I feel is the actual cause, of wealth inequality.

A friend sent me the following article from the International Herald Tribune (aka The New York Times):

Wealth Over Work

What started as what I hoped would be a critique of what's driven capital into the hands of a few holders of much capital, turned into a typical, oversimplified, finger-pointing at the rich-loving GOP. [Editor's note: I am no fan of the GOP. But, for what it's worth, I do believe they are more often than not the lesser of two evils. Yeah, it's not worth much.]

The author's explanation and argument for growing inequality, and the apparent trend towards oligarchy in the US, seemed to rest almost entirely on the GOP's tax policy.

That approach is disingenuous at worst and misinformed at best, if you want my honest opinion!

The tax argument merely deflects attention away from the real cause of wealth inequality and back onto an age-old ideological talking point. [Heavy sigh.] Simply put: easing taxes on the wealthy and abolishing the estate tax are not the reasons we're mired in this dilemma (except so far as the idea clouds the thinking of those involved in the debate.)

Oh ... and the author attacks capitalism by tacking on the "patriarchal" prefix. Newsflash to all haters: The things you despise about "capitalism" are actually not naturally occurring in free enterprise and free markets (aka true capitalism). So drop the agenda, stop demonizing capitalism and start calling it what it really is: corporatism, fascism, whatever.

The real problem, which you're probably hoping I address sometime today, is due to a less conspicuous invasion by government Oligarchs ...

Most people call it monetary policy.

But to be more specific than to just say the Federal Reserve's money-printing is going to bring hyperinflation [fyi, it's not] and ruin us all [fyi, it might], let me say the dynamic is more about interest rates.

Interest rates represent the price of money -- the cost/value of doing business. Interest rates are supposed to rise and fall based on the supply and demand of capital moving through the economy.

Guess what: The Federal Reserve and global central banks are manipulating both the price AND quantity of money. So what?

So ... when the price of money does not accurately reflect the fair value perceived by savers and borrowers, they seek out ways to achieve what they perceive as fair or necessary. 

Hence the financialization of economies.

Saving capital makes little sense when the yield is deemed to be too low.

Investing money in the real economy makes little sense when the potential ROI is deemed to be too low.

The result? Holders of capital seek returns on their wealth in the stock market, in mergers & acquisitions, in dividend income, etc. etc.

Why take on the risk of real economy investments that necessitate job creation and produce sustainable growth when the returns are more attractive in the financial economy?  

Now think about that same question and add in the quantity of money central banks are pumping into the financial system. If it's all going into the financial economy, then it's all going to those who are already sitting on a big pile of money.

And guess what else: It's not just the GOP who enables the Federal Reserve and the government's monopoly on money. If you believe Democrats are not complicit in this monetary charade, then I have bad news -- you're going to need to have your head examined by a doctor on an approved Obamacare health plan.

If you want to read more about the seeds that have been sewn by policymakers and central banks focused on "financial stability," then check out my article in Money and Markets from February 25th.]

Finally, let me bring one demonstrably embarrassing excerpt of the aforementioned article to your attention:

Why is this happening? Well, bear in mind that both Koch brothers are numbered among the 10 wealthiest Americans, and so are four Walmart heirs. Great wealth buys great political influence — and not just through campaign contributions. Many conservatives live inside an intellectual bubble of think tanks and captive media that is ultimately financed by a handful of megadonors. Not surprisingly, those inside the bubble tend to assume, instinctively, that what is good for oligarchs is good for America.

Despite the many logical fallacies littered throughout this closing paragraph, I can barely pick my jaw up off the floor upon witnessing the glaring hypocrisy of singling out the Koch brothers in order to 1) demonstrate how great wealth buys great political influence and 2) imply that conservatives are the group most subjected to such intellectually confining thought zones.

It makes me wonder: Has anyone ever heard of Warren Buffet or George Soros or Bill Gates or Mark Zuckerberg?  I don't think they are Republicans. Wealth has always bought political influence irrespective of party lines.

By the end of the International Herald Tribune article, if you think the author maintains even a shred of credibility then you might want to start walking around with a needle -- we wouldn't want your intellect getting trapped in a bubble, would we?



Jack's reaction to the March FOMC announcement

Per our Skype exchange earlier ...

[2:27:05 PM] JR Crooks: When you're done sending your BSFX trade alerts, can you share with me your reaction on the Fed announcement?

[2:38:40 PM] Jack Crooks: The dollar rocketed higher on the release of the Federal Open Market Committee statement today, as the Fed continued along its path of tapering by a further $10 billion.  This seemed to surprise the market; they were setting up for something considerably “more dovish” from new Fed Chairman Janet Yellen.  

Does this change the game for the dollar? Possibly, as I still believe the long-term dollar trend is up and many currencies technically appeared overbought against the buck.  Over the intermediate-term it seems the game will be about growth and yield again.  And maybe the euro is in the crosshairs again as Fed Chairman Yellen looks stronger, and calls for the European Central to do more, and/or cut rates on the risk of deflation, grow louder.

The US dollar is rocking and rolling, now about an hour after the FOMC announcement.

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REMEMBER: This move is coming at a critical point in time -- a few of the major currencies have coiled up and are ripe for a big move, as I suggested a week ago.

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Really ... A Real Recovery Redux?

Since 2009 we've put forth a very important idea every time the consensus began to believe a real US economic recovery would take hold.

Actually, two ideas ...

First, we figured there was always too much deflationary pressure for a real, sustainable recovery to take hold.

Second, assuming we were wrong about the first idea, we feared what a recovery would mean for the US stock market. 

We cannot stress enough that market prices are driven by sentiment, human nature. Improving sentiment for the real economy has the potential to undermine the market.

Let me explain ...

I met a friend at a coffee shop on Friday. (In case you were wondering, I'm one of the few remaining hold outs in this cultural piece de resistance -- I do not drink coffee. So I drank some fancy chai thing. I think it's some kind of tea.) He's in the market to buy a house. And I also know some guys who are in the market to sell a house.

So we discussed how new home-buyers may be coming into the market now. There are two reasons for this (besides the typical "buy low" mentality):

1) Many past short-sellers are now eligible to get a mortgage again.

2) Buyers may be looking to seize the opportunity to lock in low interest rates.

The latter point is critical. Keep it in mind ...

Also on Friday I was passed along an article by David Malpass writing in the Wall Street Journal:

The Fed's Tapering is Already Paying Off

Malpass argues the Fed's tapering is already making room for lending to be made to individuals and small businesses. He also argues this trend will actually, finally, create jobs and drive real economic growth. 

There was one very brief mention of how Fed policy has effectively driven capital to the "Haves" at the expense of the "Have-nots." In other words: the rich get richer. (I'll say no more about income gap dynamics so I can avoid contracting a case of the Mondays.)

But let me take Malpass's article to its logical conclusion for the stock market ...

If the Fed is believed to continue tapering and completely end its bond-buying program in a few quarters, then soon thereafter they'll probably be inclined to remove their very visible hand from atop the Fed Funds Rate.

Any signal to that effect will allow interest rates to rise. That's not to say they will, but the odds are greater that they will rise once the Fed assumes a lesser role in manipulating the cost of money.

Yet well before the Fed changes its low interest rate policy, investors are likely to react. 

Along with hints of economic recovery, the expectations for rising interest rates will drive the demand for lending. Small business and individuals looking to pump money into real economy investments will be looking to grab loans at near-historically low interest rates.

So ... kinda sounds like gravy on a biscuit -- it's all good, right?

Not so fast.

Part of the "rich get richer" dynamic that's been emboldened by the Fed's extraordinary monetary policy has been the rise in asset prices. Considering that in said monetary environment the money was flowing into banks and financial institutions while much of the rest of the country remained mired in mediocrity, the eventual destination for most Fed liquidity was not the real economy but, rather, the stock market.

Now consider the levels at which major US averages are now trading -- historic highs, more or less.

Indeed, there are a lot of bears out there who can't justify these levels. (That, from a contrarian's point of view, however, does suggest the market can still press a bit higher in the near-term.) As the opportunity for out-sized gains in the stock market diminishes, capital will seek other sources of return.

A source of return that has long been absent is investment in the real economy.

It may seem like improving economic fundamentals are a plus for the stock market too. But for now we've got to look at it in the context of capital flows, I think.

The Fed has created an environment where investors are addicted to capital flowing between asset markets. The Fed's departure (and consequent expectations for a rising economy and rising interest rates) could open the door for a reversal in these capital flows.

Certainly the Fed is going to do their best balancing act to avert any significant drop in market capitalization lest their "wealth effect" efforts be thwarted.

But I think there will come a point when the market is going to run out of buyers willing to buy high and hope for higher.

Maybe the reaction to Wednesday's FOMC meeting will offer some clues ...

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Get a load of this tidbit out of the IMF ...


It seems like this can shake out one of two ways:

  1. A new effort to air the dirty laundry. As long as global policymakers are being seemingly transparent, then the consensus will believe things will remain relatively under control thanks to these devoted policymakers.
  2. A genuine attempt to pressure the euro lower. The common currency remains a key feature of the Eurozone growth struggles. The periphery certainly won’t welcome a further rise in the euro should it break above nearby levels. As long as the IMF volunteers further action from the ECB, the outlook for the yield dynamic appears to favor the US dollar over the euro.

The former might mean the euro continues to climb higher. The latter, should sentiment sufficiently turn, would mean the euro rolls over and begins a push lower.



Fed up. In Italy ...

The Federal Reserve is up to bat again today. And it seems the bets on tapering are rising with each passing moment.

Let's just say I'd be surprised if they announce tapering today. I have several reasons why, but let's just say the state of things in Italy is on the Fed's radar screen.

As it pertains to tapering expecatations, we've provided thorough details and analysis in recent issues of Global Investor (for paid members only.) But let me summarize a few pieces with broad strokes:



  • Inflation is not pressuring the Fed to change policy
  • Potential adverse global market reaction to a perceived change in rates is pressuring the Fed to sit tight
  • Further, tapering could counteract the influence of Japan's Abenomics which accomodates a renewed yen-carry trade
  • The adoption of the Volcker Rule creates new uncertainty in the US financial system
  • The fragility of the European financial system has become heavily dependent on Fed activity



I think most of those items are self-explanatory. But let me update you on the latter ...

If you don't regularly read Ambrose Evans Pritchard in The Telegraph, you should. He's very thoughtful and very critical. And his focus tends to be on the Eurozone. (Note: As good as Pritchard is, try not to let his analysis dictate your trade timing. It doesn't work even when it sometimes feels like it must!)

Anyway, he had a piece published yesterday: Italy’s president fears violent insurrection in 2014 but offers no remedy

And here is the crux of his piece, questioning why Italy is in the crummy predicament to which its President admits:

Now why might that be? Might it not have something to do with the central overriding fact that Italy has a currency overvalued by 20pc or more within EMU: that it is trapped in a 1930s fixed-exchange system run a 1930s central bank that is standing idly by (for political reasons) as M3 growth stalls, credit contracts, and deflation looms?

And later he goes on to say:

To those who keep insisting that Italy should tighten its belt and claw back competitiveness by cutting wages, I would contend that this is mathematically impossible in a climate of EMU-wide deflation or near deflation.

The reason should be obvious to everybody by now. You cannot allow the nominal debt stock to rise on a shrinking nominal base. Such a policy causes the debt trajectory to spiral upwards. Italy’s debt has already jumped from 119pc to 133pc of GDP in the last three years in large part because of the fiscal austerity policies.

Yeah, it should be obvious. But that doesn't mean it won't continue to be ignored ... by Germany.

One may be inclined to think the Eurozone is on the mend just like the US, just behind the curve a little bit. We hear all kinds of things about how valuations in Europe are attractive. But I'd argue that assumes a lot for the Eurozone's growth future. I think "attractive" valuations are also relative, i.e. how European markets stack up to US markets. (Doug Kass recently stated he thinks US markets are 8 to 10 percent OVERvalued.)

The biggest threat to Europe-on-the-mend is political and social discontent.

Germany this week launches its grand coalition, a deal between parties on which direction to take German policy. And it's not been met with kind words. From The Telegraph:

“The agreement does not contain anything that would solve the European debt crisis, re-ignite growth in the euro periphery, or dampen the disastrous impact of austerity,” said Sebastian Dullien from the European Council on Foreign Relations in Berlin.

Prof Dullien said it had blocked a viable EU banking union and left in place the “toxic vicious cycle” between weak banks and weak sovereign states, each at risk of pulling the other down.

Geez. What more is there to say?

Alright, since you praise my every utterance, I'll explain what this means in my own words:

Germany will not be making any changes that meaningfully impact the Eurozone dilemma in a positive way.

And guess who isn't going to like that? Perhaps the rest of the eurozone, maybe? From an older Pritchard article:

... the new plan of Romano Prodi, Italy’s former premier and “Mr Euro”. He is now calling for Italy, Spain, and France to band together rather than deluding themselves that they can go it alone, and to “bang their fists on the table”.

Nobel economist Joe Stiglitz echoes the theme at Project Syndicate. “If Germany and others are not willing to do what it takes – if there is not enough solidarity to make the politics work – then the euro may have to be abandoned for the sake of salvaging the European project,” he said.

Frankly, nothing is going to get done in Europe anytime soon. 

The best they can hope for is a perpetually effective perceptions management campaign led by the European Central Bank's own Mario Draghi. His strategy (similar to most policymakers of the last few years) is to air some of the eurozone's dirty laundry (namely, vague concerns for Eurozone growth) so markets feel like they're in the know.

But regardless of the "disclosures", if the markets get blind-sided by what's really preventing progress in the eurozone economy, they'll get spooked quickly.

And one more blurb from a different Prtichard piece:

“Every 10pc rise in the euro costs France 150,000 jobs,"said Montebourg. "Britain, the US, Japan, all have a strategy of monetary stimulus, but in the EU we have nothing but hard money and hard budgets. The currency doesn’t belong to bankers, and it doesn’t belong to Germany, it belongs to all members of the eurozone, and we have something to say about this,”

Is that a threat to invoke Article 219 of the Lisbon Treaty giving EMU ministers the final say over the exchange rate, a power that lets them dictate monetary policy by the back-door, provided the Commission plays ball?

A Deutsche Bank study said the euro “pain threshold” for Germany is $1.79 to the dollar. It is $1.24 for France, and $1.17 for Italy, a staggering difference. The euro ended last week at $1.35. This means Germany is sitting pretty, and it is Berlin that dominates the policy machinery.

Yes, indeed -- the US has a strategy of monetary stimulus. And the arbiter of that stimulus is very mindful of the situation in Europe and its potential contagion effects if Fed tapering sparks a rethink in markets.

Tapering rhetoric shocked markets when first broached in May. At most the Fed will test out the rhetoric again today so that they may see how markets react. But ultimately they are stuck because they've generated a global "wealth effect" dependent upon monetary stimulus.

-JR Crooks


December: History versus Taper

It's that jolly time of year again.

The bears are in hibernation and the bulls are getting fat. I've been seeing reminders here and there: Decembers are good for the market, don't you know?

Very well. Without pretending I did the research, let me steer you to Variant Perception for some stats to back up the December-to-remember claims.

The moral of the story: Buy today and come back once your New Year's hangover wears off.

If, however, you're monitoring potential reasons the consensus will get caught in a long-winter's nap, you don't have to look much further than taper talk.

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In every December on record till now, the market has not had to deal with "tapering." To be sure, I am confident the Fed is NOT going to taper in December. And though a lot can happen in three months, I'd be willing to bet they don't taper in March either.

But guess what? What I think generally doesn't matter to the consensus.

What matters is how the crowd wrestles with this idea. Let's assume incoming data remains positive. Belief that the Federal Reserve tapering decision is data dependent will go a long way into feeding tapering expectations. Further, belief the Federal Reserve is dependent on growth and unemployment levels will be the primary catalyst should tapering concerns flare up.

This isn't to say the December exclamation point on this year's rally will be denied. December may turn into another positive data point. After all, though the charts of major US equity averages appear extended, they still look quite strong.

But it is to say be careful not to become complacent. If too many find comfort in the history of December, the market will become vulnerable. Just because there's egg nog to fall back on, doesn't mean the jolly souls won't freak out if they think the punch bowl is going to get taken away.

S&P 500 futures are at record highs, but momentum isn't confirming the move:


Can someone please pass the punch?

And then can someone explain what it would mean for stocks if bond prices are propelled higher here?

-JR Crooks 


Exciting times. And are stocks worth the risk?

First, we want to make you aware of some exciting opportunities in the works here at Black Swan Capital.

We've been fortunate enough to forge new working relationships with some real professionals in the financial industry. The ultimate aim of these partnerships is to bring you services and opportunities that hep you trade and invest successfully.

More specifically, these relationships make it easier to use and manage the ideas provided in BLACKSWAN's Premium Service trading newsletters.

We'll begin unveiling these relationships starting this week. So stay tuned to Currency Currents to learn about ways you can build a successful trading approach to capital markets.

Now let's talk about the markets ...

Are stocks worth the risk at these levels?

A friend of ours, Terence Brogan at Brogan Group Research, passed a chart along to us this morning. He gave me permission to share it with you. It shows the recent action in the US dollar index futures. More importantly, it shows that money flows barely budged during the recent short-covering rally we saw:

[Click on thumbnail to view full-size image.]

Here are some additional comments from Terence:

There has been very minimal accumulation of the USD since June ... from a price and volume perspective. The USD has been closing below its daily mean price more days that not, and on the days that it has closed above its daily mean price it has not been on persistent high volume. This tells us that there have been more sellers than buyers of the USD since June this year.

Basically, considering the money flow models developed by Brogan Group Research, this all suggests the US dollar is in for renewed downside pressure.

We'd have to agree. In fact, Jack's analysis is suggesting further short-term weakness (at least) is in store for the buck. And he's already recommended ways subscribers of his Black Swan Forex service -- BSFX -- can trade this price action. (Click here to subscribe or read more about BSFX.)

This US dollar action, as one might suspect, probably feeds into the general risk appetite mood of markets. In other words: because financial markets have become so tied to the flow of dollar-based liquidity around the globe, a falling dollar suggests this outward flow of dollars in search of return will persist.

All that in mind, the continued rise in the stock market prompted Jack to ask Terence if we'll see risk aversion rear its head ever again.

That's certainly the question of the day. Commentary is swirling something fierce about potential unintended consequences of Federal Reserve monetary policy, e.g. asset bubbles.

Meanwhile US stock markets are railroading higher and dragging global stocks higher alongside. Take a look at this weekly chart of the S&P 500 -- I've drawn in key trend channels that go back as far as 2009:

I also applied a Fibonacci extension to the first part of the bull market rally that began in 2009 and went through March 2011. It shows we've now fully extended (100%) that initial wave as trend channel congestion now may begin providing resistance. 

Does this mean the S&P can't or won't go even higher from here? Of course not.

But I think it does add to rationales for why the upside might be exhausted at these levels. With all the talk of bubbles circling the markets, and the continued speculation about the integrity of economic recovery around the globe, do items like this not create further doubt?

I believe a sell-off could materialize as enthusiastic investors and traders start asking themselves: is it worth the risk?

You can debate valuations back and forth till the cows come home. But up until recently, the landscape of global economics and financial markets has proven that investing in the US stock market was easily worth the risk.

But just as rising feed prices influence demand from livestock operations, rising asset prices reduce the demand from investors and traders who see potential risks growing and potential rewards dwindling.

One final chart -- margin debt on the NYSE:

Basically, the point of showing the rise to record levels of margin debt -- i.e. traders borrowing in order to invest in stocks -- is to highlight the fact that there are probably many weak hands in the market right now. It is they who will run scared at any sign of heightened market uncertainty. It is they who'll add to the selling momentum in any "abnormal" downturn.

It is they who threaten the risk appetite mood. Thus, it is they who threaten the money flows that are keeping pressure on the value of the dollar. When investors run scared in a herd-like fashion, these money flows tend to reverse as they accumulate US dollars. 

This isn't necessarily something to act on now. But it is something to keep in mind, all things considered.

Remember: Stay tuned!

-JR Crooks


Financial system order is "a chronic inhibitor of economic growth"

Perhaps you saw my comments last week BEFORE the European Central Bank surprised the markets with an interest rate cut. After seeing the inflation data come in weak, I asked:

Does that mean another LTRO (Long-Term Refinancing Operation) is right around the corner, the same corner around which the eurozone economy will supposedly turn?

Doubtful, at this stage. But don't abandon the idea completely. If things get nasty, the European Central Bank will need to do something to help re-recapitalize a financial system built on crummy collateral. 

The ECB is now moving to counteract, according to Mario Draghi's post-meeting press conference, a "prolonged period of low inflation."

And another ECB guy, Ewald Nowotny, is singing the same tune. Nowotny sees low inflation for some time. He also thinks stagflation is a greater risk than inflation. And another ECB guy, Jorg Asmussen, is so cautious he wouldn't rule out negative interest rates.

Does any of this really surprise us?

If it does, it shouldn't.

Let me offer you part of an idea we shared with our Global Investor members two weeks ago, titled:Neuroscience warns of financial market risks

Let us refer you to this article that summarizes a something else that neuroscientists are working on – it could explain, and even help anticipate, what would generate a coming collapse in risk appetite and risk markets.

“According to Lionel Barnett, lead author on the paper, they found the fact that all the elements "causally influence each other" to be of most importance. It means we must first identify all the parts of a system, then assess the relationship between individual nodes and then their causal effect on the whole. In doing so, we can find out when the fate of a node is dependant on its own behaviour because it behaves so differently from the others, and when its fate is dependant on all other nodes.

“"The dynamics of complex systems -- like the brain and the economy -- depend on how their elements causally influence each other; in other words, how information flows between them," said Barnett.”

Now let us try our best to make this relevant ...

Based on our shallow, yet appreciative, understanding of behavioral finance, financial markets are driven largely by sentiment. Herd mentality, for example, is one way of categorizing such sentiment.

Hence, if there is something to trigger an abrupt change in sentiment, a feedback loop, a chain reaction, can occur.


Back to the Wired article again:

“Using supercomputers at the Charles Sturt University in Australia, the team found that one measure called "global transfer entropy flow" reached a peak, repeatedly, "on the disordered side of the transition -- just before the tipping point".

“It's the density of the information flow that anticipates the tipping point -- "all other measures peak strictly at the tipping point itself" explained Seth.”

Now based on where our discussion is pointing, it seems counterintuitive to suggest the information flow right now is in a state of disorder and, after the tipping point is reached will converge into a state of order. After all, if the tipping point is to unleash a period of market turmoil, does that not imply disorder and chaos?

Actually, it does not if you’re thinking like a neuroscientist or Nassim Taleb. You might remember our recent review of Mr. Taleb’s new must-read book Antifragile: Things that Gain from Disorder.

So what we should do is try to visualize the life cycle of a system’s advancement and decline between states of order and disorder. Here’s a diagram we’ve produced that we think generally applies:


I think the diagram is relatively clear. Now let’s assume the system in question is financial markets.

The financial crisis brought disorder. And that disorder bred advancement in financial markets. But amidst this advancement grew up initiatives aimed at producing order, e.g. extraordinary monetary policy.

Our central banks have built a highly-ordered financial system. And because of how the elements in such a complex financial system causally influence one another, our central banks cannot extract a vital element of the system -- QE -- without causing financial market instability. 

It is why we're constantly suffering through people like Larry Summers, confounded in their smug intellectualism (at best), bumbling on about keeping the lights on during a power outage. He of course equates power outage with economic/financial crisis and lights with fiscal/monetary stimulus.

It's his analogy to why it's so important to "contain the financial system."

And though he did throw out a token criticism of monetary policy at the end -- low rates are an inhibitor of economic growth -- his overall implication is one that requires a fiscal policy to more closely manage the economy so the lights don't go off.

But monetary policy, in an effort to enable a dysfunctional fiscal policy, has effectively commandeered control of the light-switch. But because they've sought stability in the financial system first and foremost. They sought merely, albeit actively, to restore sentiment instead of letting the economy clear out excesses and malinvestment.

These problems linger. And these problems continue to push down on the light-switch. The only thing holding up the light-switch is indeed extraordinary accommodation.

The million dollar question: can more accommodation, whether monetary or fiscal, in an effort to contain the financial system, eliminate the pressures pushing down on the light-switch?

As Mr. Summers mentioned, we're four to five years down the road now. I ask: why hasn't accommodation worked yet? And no, Paul Krugman, I'm not asking you because I already know your answer.

Are we closer to financial system decline -- the collapse of the highly-ordered system -- than most are willing to believe? If so, maybe we should look at the good that could come from disorder in our financial system ...

After all, we'd see the deterioration of "a chronic inhibitor of economic growth", that which is "holding our economies back from achieving their true potential."

-JR Crooks


Eurozone economy will "turn the corner" ... to a new LTRO?

And the headlines read:

Sharp euro zone inflation drop, record joblessness add to ECB conundrum (Reuters)

EU sees 'hope' but also lower growth (BBC)

Euro zone economy turns corner, but growth, inflation subdued: EU executive (Reuters)

Well, the downward revision of growth from 1.2% to 1.1% is certainly not jaw-dropping. But is it enough to spark a subtle shift in sentiment that generates a more fragile consensus on the eurozone?


The joblessness is no surprise. As it has been in the US, unemployment will be a critical impediment to the eurozone's economic recovery. Spanish utility Gas Natural Fenosa has particularly acknowledged the depressed demand in Spain and the nearby areas. It's due very much to the severe unemployment situation. Gas Natural seeks to make its progress and profit in Latin America in the coming years because the outlook for economic growth in the eurozone remains grim.

But perhaps the most important piece of the headlines to be pulled out is the inflation data. We know what subdued inflation means in this era of monetary accommodation: more accommodation.

Does that mean another LTRO (Long-Term Refinancing Operation) is right around the corner, the same corner around which the eurozone economy will supposedly turn?

Doubtful, at this stage. But don't abandon the idea completely. If things get nasty, the European Central Bank will need to do something to help re-recapitalize a financial system built on crummy collateral. 

Instead, what's more likely in the interim is the strategy du jour for central banks: talk the market to sleep. 

The ECB's rhetoric, perhaps when they meet later this week, in light of subdued inflation, will signal:

  1. Economic activity shows stabilization but still has room for improvement
  2. The central bank has room to provide additional support measures IF needed without fear of generating inflation or asset bubbles

In other words: don't worry about the economy. But if you do, remember we're there to backstop it ... so don't worry about the economy.

Ok. Got it. More accommodation. Woo hoo. So what?

So, barring any real shocks to the financial system, real or perceived, we're left to juxtapose expectations for the European Central Bank and the Federal Reserve.

In the weeks following the agreement reached on the US debt ceiling, market expectations shifted mightily into believing Federal Reserve tapering was to be long-delayed. Decent US economic data is surely to erode that enthusiasm and expectations will then shift back to believing tapering is on its way in.

Assuming I'm right about the inevitable shift in Fed expectations, and the ECB's further-accommodation-if-needed rhetoric, the resulting change in yield differential will be US dollar supportive.

And that seems appropriately timed, since in just the last few weeks predictions for the US dollar's demise have ramped up noticeably. And this story about South Africa diversifying their currency reserves is sure to validate the bears' collective growl.

The euro may recoup some of its recent sharp losses in the coming days. But it could have very likely already made it through a turning point of its own, one that sends the value of the euro much lower in coming months.

-JR Crooks

P.S. We mentioned the open EUR/USD trade last week that was showing open gains of about $1,500. Well, that trade is still open in Jack's Black Swan Forex trading service -- and it's now showing $2,810 of open gains per one standard-sized lot. And Jack's locked in, gauranteed, $2,540 of it.

Click here to see how the rest of Jack's trading advice has panned out this year. I imagine you'll be impressed.


The IMF: Setting the bar low ...

We heard from the International Monetary Fund (IMF) this week.

What we heard was not good. But it was not surprising either. And that's the point, I think.

Conveniently, there's plenty to distract the market from the downward revisions the IMF made to global 2013 and 2014 growth forecasts plus the fact that the IMF believes:

  • Long-term global economic growth will run at subdued levels;  "A likely scenario for the global economy is one of continued, plausible disappointments everywhere."
  • Short-term US fiscal matters could shake-up the rest of the world
  • The European Central Bank must continue on with accommodative policy; "The ECB should consider additional monetary support, through lower policy rates, forward guidance on future rates, negative deposit rates, or other unconventional policy measures. Since these factors reinforce each other, a vigorous response on all fronts offers the best way forward. In the absence of a comprehensive policy response, matters could easily worsen."
  • Countries must use their exchanges rates to alleviate growth pressures, rather than unwind fx reserves to try and stem capital outflows
  • Some emerging markets are suffering what could be called stagflation
  • China's growth model -- dependence on exports, credit and investment -- has become exhausted and must change

Gee. How depressing.

But guess what -- the market doesn't care today. And it likely won't care too much about these comments down the road either.


Because the IMF has aired the dirty laundry. They have made know the growth head-winds and the financial risks. These things can not come as a surprise to anyone now. Ultimately, the only things that will impact the market are individual data points or trends that suggest policymakers and leaders cannot contain the risks to growth and financial markets.

Until then, investors are more than likely happy to give economic growth the benefit of the doubt.

Besides, we'd much rather focus on the charades in Washington D.C. 

Today it appears politicians are closer to a compromise than they were yesterday. Yesterday I believed ideological differences would push us past the debt ceiling deadline, force a market downturn and then generate a compromise and continuing resolution.

I tend to think we'll see the broad market, particularly US and global stock markets, slide before the month is over. I believe it will be sharp. But I also believe it will be relatively short-lived, barring a real surprise from the US debt standoff. 

The market is higher today. I'll be looking to sell into any follow-through strength early next week.

-JR Crooks