Ben Bernanke

If it works for the ECB it can work for the Fed. Be happy!

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"The only thing that saves us from bureaucracy is its inefficiency."

– Eugene McCarthy

We foolishly find ourselves asking: when will Federal Reserve quantitative easing reach its limit?

Considering the consequent boost to risk appetite that flows from QE, enriching those who hold financial assets while doing little for those holding welding torches and spatulas, we are happy to tell you that the Fed has plenty of room to maneuver the printing presses still.

And if you’re wondering just how much credit they can pump into banks or how much government debt they can buy up in order to keep the Keynesian desperados operating, it’s at least 26% more of total government debt – that would take them to even with the ECB efforts that have to this point “succeeded” in suppressing severe risks:  

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While the Fed has only taken on assets in proportion to government debt increases of 37%, the ECB has matched about 63% of the increase in government debt.

And it’s likely the Fed won’t be stopping anytime soon. From The Contrary Investor, viaZerohedge.com:

As we’ve written about many a time, credit is the lubricant that makes really any economy move forward.  In a generational credit cycle deleveraging environment, which we believe is still the correct macro, if credit contracts in one sector of the economy, that contraction must be offset by another sector continuing to take on leverage at a rate at least equal to the sector contraction in question simply to keep macro economic growth stable.  To the point, Government sector credit (debt) expansion has offset household credit contraction in the current economic cycle so far. 

The household sector, while there has been some marginal improvement in consumer credit numbers, has been reluctant to leverage back up.

We took the following three charts from kingworldnews.com:  

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Clearly the current surge in growth and recovery talk may be overstated, if you consider inflation’s impact on GDP (chart 1). And the state of the consumer is still a big question market, if not still a major sore spot. Without the household sector to fall back on, the public sector will likely continue to compensate for households thriftiness. Well, maybe.

There are clouds on the horizon—the Paul-Ryan-Cumulus-Cuttis cloud, for example.  If those dastardly Republicans, such as Ryan, are serious about putting our massively bloated government on a diet, it could be very scary for the Keynesians in our midst.  But, they should not fear.  After all, Ben Bernanke told us recently how he saved the world once; why should we even dream he couldn’t do it again should fiscal stimulus be stymied. 

So, stocks traders; don’t be concerned about the fact this is the most tepid economic “recovery” from a major recession we have ever seen.  Don’t worry that a one good push will topple the Eurozone into the abyss.  Don’t even think about further unrest in China, they have plenty of jail space and eager comrades to beat the bushes to ferret out evil doers. 

Be happy.  We are sure Apple can hit $1,000 in no time.  

Apple Computer Daily 1996-2012:  Rocket launch!  

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Have we seen a similar trajectory before?  And did everyone want to buy it and quit their day jobs back then?  Yes!

Nasdaq 100 Index Daily 1996-2000:  

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And in case we forgot how badly that “buy Nasdaq 100 then retire” idea worked out, here is the rest of the story...  

040312 ndx complete resized 600

Don’t worry.  Be happy! 

 

Regards,

Jack and JR

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It's a lay-up: buy stocks!

cowboy bull“He may look like an idiot and talk like an idiot, but don't let that fool you -- he really is an idiot.”

- Groucho Marx


John Ross asked me this morning if I could create a scenario whereby stocks fall.  I laughed and said, "Well ... no!" And maybe that is the point. No doubt 'if you are not long, you are wrong' is playing out in spades. But we’ve seen that sentiment many times before near tops.  

The primary thematic shaping up seems the idea that bonds have topped and as this money leaves bonds it will power stocks higher—globally. The idea seems to make sense; but often it is never that easy.  Taking a look at the chart below, there doesn’t seem a heck of a lot of correlation to hang your hat upon, only to say the long-term trend higher in bonds (lower in yields) has been met by a corresponding big run in stocks.    

Let’s consider some reasons why US stocks might NOT go a lot higher and, for grins, maybe even, dare I say it, “correct.”  

  1. A recovery in the US economy could mean finally financial assets will start competing for funds and the Bernanke Put, i.e. QE moral hazard liquidity juice, fades. Bonds would get hit here, but stocks might at least correct.

  2. Bernanke’s concern the job market is still not healed may play out because fiscal stimulus fades as the year progresses. Thus, we have well below trend growth and rising prices for energy and food leading to at least a mild case of stagflation; that isn’t good for either stocks or bonds.

  3. Germany decides to go “all in” and throws its full faith and credit behind a Eurobond for the Eurozone. Immediately, the risk profile improves in Europe. S&P and Moody’s decide it’s time to upgrade European paper and at the same time downgrade US paper given that Washington can make no real cuts amidst ideological squabbling. Lots of capital flows back to European bonds and stocks and out of the US; a possible triple-whammy out of US assets (stocks, bonds, and the dollar).

  4. China financial and social unrest ramp up and the Communist Party is at odds on stimulus given their concern about inflation; therefore it’s better to have security locally than worry about Western markets; the additional stimulus never arrives as growth and demand forecasts for China ratchet lower. Likely bad for stocks, but maybe good for bonds.

  5. Eurozone. 'Nuff said!

  6. Rising emerging market capital controls a la Brazil (tacitly condoned by the IMF) are met with rising trade tariffs from developed countries.  Money flows out of risk assets (stocks), quickly from the periphery, and back into bonds as global trade falls.

  7. Republicans win the White House and Congress, fire Ben Bernanke, and make Ron Paul Fed Chairman. They cut the budget deficit twice as much as what Paul Ryan is lobbying for. Ultimately it would be the best thing that happened to the US financial position in a hundred years, but there would be hell to pay as US credit drains from the global economy (and we have to listen to the moochers whining and crying about “fairness” day in, and day out). US bonds rally big time, so does the US dollar; stocks would likely be hit very hard initially, then stage a gargantuan rally.  [I know; but a guy can dream.] 

For now, “don’t fight the Fed” and “the trend is your friend” are winning the day. And if the bulls are right about US recovery, European healing, and new Chinese stimulus soon on the way, it could keep running. No doubt.  

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Euro rally: Point, Counterpoint, and Guesses

foolCaptain of our fairy band,

Helena is here at hand,

And the youth, mistook by me,

Pleading for a lover's fee.

Shall we their fond pageant see?

Lord, what fools these mortals be!

- A Midsummer Nights Dream Act 3, scene 2

 

It is said that markets discount the stuff we do know and run on the stuff we don’t.  Let’s take a look at what we do know, might know, and some best guesses about the future (called forecasts by “serious” analysts), as it relates to the rally in EUR/USD:  

1. Euro short rates relative to the US have turned higher again, i.e. the yield differential in favor of euro is improving.

Question: Will this continue? 

Best Guess: I don’t think so because euro supply may begin to overwhelm demand (see #2 below).  And if US growth is for real, and a the 10 nation Eurozone recession is for real, one would expect US 3-month benchmark rates to drift higher relative to the euro.  

2. European Central Bank expected to flood banks with more credit next week; euro seemed to rally sharply on the last round of Long-term Refinancing Operations (LTRO) by the European Central Bank, i.e. three-year term loans to the European banking system. 

Question:  Will we see the same type of rally in the periphery debt this time around?

Best Guess: Unlikely, in fact it might be a good time for those who bought last time to sell into the next round of ECB Long-term Refinancing Operations.  If so, if the EUR/USD rally shows signs of stalling next week, it could be time to start looking the other way.  

3. There is a lot of Fed jawboning about the potential for QE3.

Question: Is QE3 baked in the cake?

Best Guess: I don’t think so.  Two points here: 1) If the US recovery is for real, it doesn’t make sense that Fed Governors are so boisterous about the potential for QE3; and 2) Even Ben Bernanke (going out on limb here) has to understand that monetary policy stimulus has limits that become counterproductive at some stage and many, including me, think we are into the counterproductive territory.  Plus, how will QE3 that sits on US banks' balance sheets help any more than the pledge to hold Fed Funds rates low into 2014, in and of itself an incredible act by a central bank chief? It is what a rational person, assuming Ben is rationale, may ask himself.

Bottom line: Though the recent move in EUR/USD is powerful, I think it is a relatively near-term event. Here’s why:  1) If the US is really growing, the dollar at some point wins on growth and yield relative to euro.  Growth and yield are the intermediate-term drivers for currencies, and 2) if the US goes back into recession, a case we made in our latest Global Investor monthly issue; Europe goes into an even deeper one and China is in trouble too.  This means the US dollar, for all its warts, gets a big risk bid.  

We watch and see how reality plays out against our best guesses ...   

EUR/USD Daily:      

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130 billion bad reasons to think the euro's foundation has changed.

crushed taxi“So what?” he asked. “Things will only get worse. We have reached a point where we’re trying to figure out how to survive just the next day, let alone the next 10 days, the next month, the next year.”  

-Anastasis Chrisopoulos, Athens taxi driver (from Reuters)

 

130-billion-euro here, 130-billion-euro there, and pretty soon you have to start finding some growth!

One adage that seems to work as much as anything else, and why it is an adage I guess, is “buy the rumor and sell the news.”  I won’t bore you with the behavioral aspects of why this works, I think you know.  We are seeing it a bit this morning on display on news a Greek default has been averted: the euro is lower, and ditto for most Eurozone bonds since the announcement of a deal that gives Greece another 130-billion-euro it can pour down the rabbit hole with the rest of the money funneled in by Eurozone taxpayers.   

Of course, sooner or later financial engineering reaches the limits of its public relations effect and there must be some underlying payoff from said engineering besides getting funds to follow banks chasing into periphery debt for a trade.  It’s not that rising periphery bond prices, i.e. lower yields, isn’t helpful; it is.  But even at current rate levels, it will be mighty hard for many countries to maintain austerity pledges; all attempts to do so will likely accentuate the trend we see in the chart below:      

022112 ez gdp

And of course, this chart is the mirror image of the domestic adjustments periphery countries have to make because they do not have a free-floating currency available to help them make these adjustments:      

022112 ez unemployment

Thus, periphery economies desperately need some growth.  Rising unemployment and tighter budgets will not produce revenues needed to pay debt; instead it produces a self-feeing vicious spiral downward.  This view seems completely at odds with the Troika program even though the Greek economy provides them with live test case of abject failure stemming directly from the implementation of their own flawed theories.     

And here is why it will likely get worse for Greece and other periphery countries whose growth is heading lower—the real economy will be starved.   

We have already witnessed this economic/money/manipulation phenomenon in the US, from the WSJ this morning:  

“The eight giant European banks that have disclosed their annual results in recent weeks reported holding a total of about $816 billion in cash and deposits at central banks as of Dec. 31.  That is up 50% from a year earlier, when the same banks were holding roughly $543 billion.”  

Does any of this sound familiar?  You can lead a horse to water, in fact you can force-feed said horse with massive amounts of reserves, but you can’t make him lend any of it to the real economy where real people build real businesses and hire other real people who need real jobs.   

Just in case you forgot just how tightly US banks have held on to their Fed sponsored reserves via the massively steep yield curve that impoverishes savers to subsidize bank healing, here is a look.  This chart shows reserves in the US banking system ... hmmm ... three years and counting so far since Bernanke and Company decided this is the only viable strategy for the economy.  Viable for financial assets, but the other side of the economy is still starved ...    

022112 fed reserves 

The point is, despite the new Greek rescue (I am losing count how many we have had so far), it appears the Eurozone, now clearly a two-track world with Germany bathing in credit and low rates and low unemployment (which adds to more angst and animosity toward Germans amongst the PIIGS), appears collectively heading into deeper recession.  

One wonders if now, finally, EU leaders have run out of rabbits of financial engineering to pull from their hats.  Financial engineering is a lot easier than real growth.  If you don’t believe me, go ask Goldman; after all it is their fun and games that caused much of this Greek problem in the first place.  

022112 eur vs gdp     

Hmmm ...

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