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The Debt Ceiling End Game

Citi FX guru Steven Englander has a new note out this evening titled: No coin + temporary debt ceiling extension + sequester = USD negative.

 

In it he notes that the rejection of the trillion dollar coin idea to avert the debt ceiling is not alone a market moving event, but that the hard language taken by the White House that the choices boil down to clean lift or default raises the odds of a debt ceiling breach.

His take:

So it is possible that we will get a technical default for a few days, but more likely that Congress will give in, vote the debt ceiling up temporarily, and let the automatic sequesters kick in. Mounting risk of a technical default was USD positive in 2011 because it led to cutting of long-risk positions and the USD/Treasury market remained safe havens.  However, it also occurred in an environment of slowing EM growth and intensifying euro zone sovereign risk pressure, so the USD support came from external forces as well. Given that investors are now somewhat long risk again, the position cutting is again likely to be USD positive, however, unattractive US assets were. As was the case in 2011, it is very unlikely that the Treasury will not pay its bills, although even a technical default could have very unforeseen consequences, given the multiple functions that Treasuries play in global financial markets. The more likely scenario of sequester plus grudging debt ceiling rise is USD negative.

It will put more pressure on the Fed to keep pumping liquidity into the US economy without giving any reassurance to investors that long-term fiscal issues are close to resolution.

That seems reasonable. A debt ceiling hike + a full sequester, which would equal a weaker economy and more pumping.

With Europe healing and China rebounding, USD would be the big loser.

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by jackbassteam on January 13, 2013  •  Permalink
Posted in Federal Reserve, Finance, forecasts, Politics
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Posted by jackbassteam on January 13, 2013

http://amp2012.com/2013/01/13/the-debt-ceiling-end-game/

QE 4 Update/ Review

English: President Barack Obama confers with F...

English: President Barack Obama confers with Federal Reserve Chairman Ben Bernanke following their meeting at the White House. (Photo credit: Wikipedia)

The Big Picture

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  • Our market letter will return in the New Year
What Is The Purpose of QE?

Posted: 25 Dec 2012 02:00 PM PST

As detailed earlier in the month, the Federal Reserve announced more stimulus, otherwise known as QE4, at its recent meeting.

Lots of the discussion thus far has focused on whether or not QE will happen and not on the purpose of QE.

What we discuss below is a good example of economists discussing the probability of QE rather than why QE is necessary or what it will accomplish.

So, what is QE supposed to do?  Bernanke told us in his speech over the summer in Jackson Hole:

“After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve’s large-scale purchases have significantly lowered long-term Treasury yields. For example, studies have found that the $1.7 trillion in purchases of Treasury and agency securities under the first LSAP program reduced the yield on 10-year Treasury securities by between 40 and 110 basis points. The $600 billion in Treasury purchases under the second LSAP program has been credited with lowering 10-year yields by an additional 15 to 45 basis points.12 Three studies considering the cumulative influence of all the Federal Reserve’s asset purchases, including those made under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield.13 These effects are economically meaningful.

LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.

While there is substantial evidence that the Federal Reserve’s asset purchases have lowered longer-term yields and eased broader financial conditions, obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual–how the economy would have performed in the absence of the Federal Reserve’s actions–cannot be directly observed. If we are willing to take as a working assumption that the effects of easier financial conditions on the economy are similar to those observed historically, then econometric models can be used to estimate the effects of LSAPs on the economy. Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.15

This is not the first time the Federal Reserve has laid out this argument.  In a November 4, 2010 Washington Post op-ed, the day after QE2 was approved, Ben Bernanke defended their actions with the following passage:

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 Board Chairman Ben Bernanke said Thursday that a controversial $600 billion bond buying plan has contributed to a stronger stock market. “Our policies have contributed to a stronger stock market just as they did in March 2009 when we did the first iteration of this program,” Bernanke said at a Federal Deposit Insurance Corp. forum on small businesses. “A stronger economy helps small businesses more than larger businesses. Interest rates are higher but that’s mostly because the news is better. It has responded to a stronger economy and better expectations.”

To sum it all up:

• The Federal Reserve buys Treasury bonds in order to push down interest rates, making them an unattractive investment (last shown here, page 6) .

• Investors respond by moving out the risk curve and buying assets like corporate bonds and stocks, pushing them higher.  The Federal Reserve believes this happens via the portfolio balance theory.

• But according to the Federal Reserve, moving out the risk curve does not include buying agricultural or crude oil futures, so do not blame them for higher food or gasoline prices.

• Higher asset prices create a wealth effect, which increases spending and confidence and improves the economy. The Federal Reserve believes this has helped create 2 million jobs.

We agree with half of what is written above.

• QE does produce lower interest rates, or at least the belief that rates are too low.  This then pushes investors out the risk curve which is why stocks have such an immediate and positive reaction whenever QE is speculated.

• The Federal Reserve is playing politics in regards to the effect of QE on commodity prices.  There is no reason to believe the risk curve ends at low-rated stocks.  How much QE affects food and gasoline prices can be debated, but to argue there is no effect at all, and will never be an effect under any scenario, merely because the Federal Reserve does not want to answer for these higher prices, is just wrong.

• The argument that higher asset prices produce a wealth effect is only partially correct.  Two conditions must be met for a wealth effect to ensue.  Net worth must reach a new high and it must be perceived to be permanent.  This is why housing produced such a powerful wealth effect before 2006.  Home prices always went up and their gains were perceived to be permanent.  Currently we have a retracement of losses and a widespread distrust of financial markets.  These conditions will not produce any wealth effect and we believe they have not.

QE is great for Wall Street as it produces more volatility (brokers like this), higher stocks prices (fund managers like this) and draws lots of attention (analysts like this).  It is not good for Main Street because it does not create wealth.  QE’s effects are not perceived to be permanent, so it does not lead to higher GDP or job growth.

What Will The Federal Reserve Do?

In Septmber we noted that the median expectation in a survey of primary dealers calls for $500 billion of additional purchases heavily tilted toward mortgage-backed securities.   If the purpose of QE is to push stock prices higher, then the Federal Reserve has to deliver at least $500 billion in purchases.  Otherwise it will disappoint risk markets.

Right now, if we have to guess, we believe the Federal Reserve will announce purchases of less than $500 billion. In January the Federal Reserve adopted an inflation target of 2.0%.  As we detailed in a conference call last month (transcript, handout, audio), inflation expectations are running well above this target.  One measure of inflation expectations, the 10-year TIPS inflation breakeven rate, is shown below.  Further, in April, when Bernanke was asked if he would adopt a suggestion from Paul Krugman to expand the target to 3%, he flatly rejected the idea (explained here).

The hawks will argue expected inflation is too high to add more stimulus, an argument which will carry some weight.  The compromise will be a program of less than $500 billion in purchases which will disappoint the markets.

Click to enlarge:

Source: Arbor Research

 

 

 

 

 
 

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by jackbassteam on December 26, 2012  •  Permalink
Posted in Bernanke, Bonds, Economic Recovery, Federal Reserve, Interest Rates, Investments
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Posted by jackbassteam on December 26, 2012

http://amp2012.com/2012/12/26/qe-4-update-review/

Rumors of QE4

Go Away Federal Reserve System!

Go Away Federal Reserve System! (Photo credit: r0b0r0b)

The Federal Reserve will hold its last policy meeting of the year next week, and two key issues are expected to dominate the gathering and the market’s attention — the expiration of “Operation Twist” and a potential change in interest rate guidelines.

Implemented in September 2011, Operation Twist was designed to lower rates for mortgages and corporate bonds. The program, which expires at the end of this month, entailed the Fed buying $667 billion (roughly $45 billion per month) in longer-term Treasuries above 6-year durations, while selling the same amount in shorter-term securities under 3-year durations.

The goal of the monetary twist has been to lower long-term rates to fuel consumer and corporate borrowing and spending.

“With Operation Twist ending, that means they’ve run out of short-dated securities to sell in order to purchase more [longer-term securities], so what they’ve got to move to now is buying up pure $40 billion per month of mortgage-backed securities [QE3],” says Andrew Wilkinson, chief economic strategist at Miller Tabak. “They probably have to compensate for that loss of $40 [billion] to $45 billion per month.”

Rumors of QE4

Wilkinson is touching on concerns that have recently been addressed by various Fed governors. That is, that simply carrying out the third round of quantitative easing is not enough to boost the economy. QE3 is an open-ended program that has the Fed buying $40 billion per month in mortgage-backed securities.

So will the Fed turn Operation Twist into another outright securities purchasing program, essentially becoming QE4? Or are they more confident in the economy given the improvement in the November jobs report?

The market will be watching very closely to see if the Fed changes its tune. The decision on handling Twist’s expiration will be very telling as to how the committee views the recovery and how much stimulus will be pumped into the economy in 2013.

 

FOMC Rate Policy: Debating Numerical Thresholds

“There’s something else on the table with the Fed though,” says Wilkinson. “They may move to targeting a specific rate of unemployment as a guarantee to when they can stand by the promise of low interest rates.”

The Fed’s current policy is to hold rates near zero through mid-2015. Chatter is growing louder that the Fed will change its guidelines, and instead of tying interest rate policy to a calendar date, they will link it toward set goals for the unemployment and inflation rates. This would directly link rates to the Fed’s dual mandate to promote maximum employment and price stability.

Fed Vice Chairman Janet Yellen recently joined several other Fed officials calling for specific thresholds to guide policy. These thresholds would not be triggers to change policy, merely guidelines for debate.

“For now, it doesn’t really matter,” Wilkinson says of the possible shift. “As next year progresses we’ll hear more in terms of jawboning from the Fed, how it’s going to go about this process, how it’s going to anchor its inflation expectations, and whether we should be focused on more than purely employment. Inflation is equally important, but there’s a lid on it at around 2%, according to the Fed’s projections. We also have to factor in GDP as well.”

The Fed’s gathering will end Wednesday with a 12:15 p.m. ET policy statement, and a press conference with Fed chief Ben Bernanke will follow a short time later.

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by jackbassteam on December 9, 2012  •  Permalink
Posted in Bernanke, Central Banks, Federal Reserve, forecasts, Wealth Creation
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Posted by jackbassteam on December 9, 2012

http://amp2012.com/2012/12/09/rumors-of-qe4/

Economic Bears Turn Positive

English: Mohamed A. El-Erian, Managing Directo...

English: Mohamed A. El-Erian, Managing Director of the Pacific Investment Management Company, speaking at the World Economic Forum Summit on the Global Agenda 2008 in Dubai, United Arab Emirates. (Photo credit: Wikipedia)

Three prominent bears — David Rosenberg, chief economist at Gluskin Sheff & Associates, Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., and David Levy, chairman of the Jerome Levy Forecasting Center — separately see some hopeful signs. These include a housing market that is healing, a more competitive manufacturing industry and technological breakthroughs that could boost productivity.

“More so than at any time in the past three years, I’m doing whatever I can to identify silver linings in the clouds,” Rosenberg said.

None of the three is ready to declare the all-clear. While the chances the economy could perform better than expected are “somewhat” higher than before, the downside risks are bigger, said El-Erian, who oversees $1.9 trillion at Pimco in Newport Beach, California. These include the so-called fiscal cliff, which all three agree would trigger a recession if nothing is done to avert its spending cuts and tax increases.

The continued caution of the three economists is reflected in advice they are giving investors. Rosenberg recommends gold- mining stocks and shares of utility companies, the latter as part of a strategy he’s dubbed “Safety and Income at a Reasonable Price.”

‘Be Defensive’

“This is a time to be defensive,” said Levy of the Mount Kisco, New York-based economic forecaster. “We are still in a rocky period.” He has been bullish on Treasury bonds for more than five years and eventually sees yields falling even further. The yield on the 30-year bond was 2.78 percent as of 5 p.m. yesterday in New York, according to Bloomberg Bond Trader data.

El-Erian suggests investors look outside the U.S. for economies that are growing faster and put money in companies and nations with strong balance sheets, includingBrazil’s and Mexico’s local bonds. He said investors also should “actively” manage their portfolios to protect against downside risks and take advantage of upside surprises that might materialize through the use of puts, calls and other trading strategies.

El-Erian and Rosenberg recommended a defensive stance on financial markets about a year ago in separate interviews on Bloomberg Television. Toronto-based Rosenberg said investors should look at dividend-paying health-care, utility and consumer-staples stocks, which are least-tied to changes in economic growth.

Worst Performance

Drugmakers in the Standard & Poor’s 500 Index are up 16 percent and producers of household goods have risen 9.7 percent in 2012. Utilities have fallen about 2 percent for the worst performance among the 10 major industries in the gauge.

El-Erian said Dec. 19 that the first part of 2012 would be “risk off” as Europe’s sovereign-debt crisis encouraged demand for safety. Yields on 10-year U.S. Treasuries rose to 2.21 percenton March 30 from 1.88 percent at the start of the year, while theStandard & Poor’s 500 Index (SPXL1) jumped 12 percent. For the year to date, the stock index also is up 12 percent.

The U.S. economy will grow 2 percent next year and 2.8 percent in 2014, the Paris-based Organization for Economic Cooperation and Development said last month. That is faster than the average for the OECD’s 34 members of 1.4 percent in 2013 and 2.3 percent in 2014.

Both Rosenberg and Levy foresaw the bursting of the housing bubble in 2007, the former when he was chief economist for North America at Merrill Lynch & Co. in New York. They’ve generally been more pessimistic than the consensus of economists since then, with Levy saying the U.S. is experiencing a “contained depression,” and Rosenberg incorrectly forecasting the U.S. would relapse into recession at the start of this year. The previous slump began in December 2007 and lasted 18 months.

More Downbeat

El-Erian and his colleagues at Pimco also have tended to be more downbeat. The 54-year-old former International Monetary Fund economist first used the term “new normal” in May 2009 to describe the probable medium-term path of the global economy. For the U.S., that meant annual growth of about 2 percent.

Since the recovery began in the middle of 2009, GDP has expanded by an average of 2.2 percent, in line with the Pimco forecast and short of repeated projections for faster growth by the Federal Reserve and the White House.

Pimco’s Total Return Fund, the world’s largest mutual fund, is up 10.3 percent this year, beating 95 percent of similarly run mutual funds, according to data compiled by Bloomberg.

‘A Stinker’

It has attracted about $17 billion in net new money in 2012, according to Chicago-based research firm Morningstar Inc., after losing $5 billion to withdrawals in 2011, when it suffered what William Gross, the company’s co-chief investment officer with El-Erian, called “a stinker.” It eliminated U.S. Treasuries early in the year and missed a rally when investors rushed to the safety of government-backed debt.

One reason Rosenberg, 52, is trying to look on the bright side is because many other economists have turned more bearish.

“That’s raised my contrarian antenna,” he said.

GDP probably will grow 2 percent in 2013, down from a projected 2.2 percent this year, according to the median forecast of 74 economists surveyed by Bloomberg last month.

Among the more hopeful signs, Rosenberg said, is the bottoming out of the housing market. New-home construction rose 3.6 percent to a four-year high in October, according to the Commerce Department.

‘Strong Phase’

“We’re in a strong phase of the recovery,” Martin Connor, chief financial officer of Toll Brothers Inc. (TOL), a Horsham, Pennsylvania-based luxury homebuilder, said during a conference presentation on Nov. 15. “It’s a function of five years of pent-up demand being released.” Affordability and rising prices also are “spurring people to buy.”

The banking industry also is on the mend, Rosenberg said. “The banks are certainly in better position and more willing to lend money than they have been for years,” after buttressing their balance sheets.

JPMorgan Chase & Co., the biggest U.S. bank by assets, provided $15 billion of credit for small businesses in the third quarter, up 21 percent from a year earlier, Chief Executive Officer Jamie Dimon said in an Oct. 12 press release.

Rosenberg also is encouraged by what he calls a “secular renaissance” of the U.S. manufacturing industry — with output rising 16 percent during the recovery, according to the Fed — and a surge in American energy production.

Net Exporter

U.S. oil output is poised to surpass Saudi Arabia’s in the next decade, making the world’s largest fuel consumer almost self-reliant and putting it on track to become a net exporter, the International Energy Agency said last month.

Even so, problems remain. Rosenberg said he is particularly worried about continued high unemployment – 7.9 percent in October, up from 4.7 percent five years ago — and its impact on worker earnings.

“This will go down as a wageless recovery,” the Canadian economist said.

Average hourly earnings for production workers rose 1.1 percent in the 12 months to October, the weakest since Labor Department records began in 1965.

The bottom line for Rosenberg: The economy still is “stuck in the mud.”

Pimco’s El-Erian predicts GDP probably will grow 1.5 percent to 2 percent during the next year as President Barack Obama and Congress strike a “mini-bargain” to avoid the fiscal cliff and moderately reduce the budget deficit.

‘Sputnik Moment’

The economy could do better if policy makers can pull off what El-Erian calls a “Sputnik moment” — a critical mass of reforms that restores corporate confidence and unleashes pent-up investment, hiring and demand. Such steps might include measures to tackle youth and long-term unemployment, as well as cutting the deficit.

“There’s tremendous cash on the sidelines,” he said.

David Cote, chief executive officer of Morris Township, New Jersey-based Honeywell International Inc. (HON), says a budget deal alone could do wonders for the U.S.

“There is a prospect for a robust recovery, something bigger than I think most economists are forecasting,” if the White House and Congress can reach a credible agreement to reduce the deficit by $4 trillion over 10 years, he told Bloomberg Television on Nov. 28.

El-Erian, who re-joined Pimco in 2007 after being in charge of managing Harvard University’s endowment, also sees a chance that technological breakthroughs could give the U.S. a productivity-driven boost. At the top of the list is digitalization: the conversion of pictures, sound and other information into a form computers can process.

Economic Impact

“The whole trend is having an impact on very many sectors of the economy,” he said.

The trouble is that while the potential for such pleasant surprises is bigger than before, it isn’t “meaningfully” bigger, according to El-Erian. And the downside dangers are greater, he said. Besides the fiscal cliff, they include the debt crisis in Europe, China’s challenge in overhauling its export-driven economy and the risk of continued instability in the Middle East.

Levy said the U.S. private sector is in the middle of a prolonged period of cleaning up its balance sheet after decades in which debt grew faster than income.

“We’ve been at this for five years,” he said. “If we’re lucky, it might take a tiny bit less than a decade.” He added he’d be surprised if the U.S. is able to avoid a recession in the next few years.

More Progress

America, though, has made more progress than Europe and Japan in dealing with its debts, Levy said.

“The U.S. will do generally better in this rocky period than much of the rest of the world, because the risks are higher and the problems are bigger in many places overseas,” the 57- year-old economist said. That includes China, where new leaders face decisions on how — and whether — to curb state enterprises, boost access to credit for private companies and raise consumption.

Levy, who served on the board of the Levy Economics Institute of Bard College in Annandale-on-Hudson, New York, from 1986 to 2001, said America also will benefit from a “secular improvement” in its trade balance. Driving that improvement: the manufacturing revival, boom in domestic energy output and increased demand for U.S. agricultural exports as developing nations grow richer.

“By the end of this decade, we might be looking at trade surpluses,” he said. The U.S. ran a$415.5 billion trade deficit through the first nine months of this year.

Future business investment also is being stored up as companies put off capital expenditures because of depressed demand for their products, he said. Eventually, such spending will surge, boosting productivity and profits.

“While the U.S. is going through a long-term, rough adjustment period,” Levy told Bloomberg Radio Nov. 13, “we are weathering it.

‘‘We are going to come out the other side,’’ he added. ‘‘And there is a very bright long-term.’

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by jackbassteam on December 8, 2012  •  Permalink
Posted in Federal Reserve, Finance, forecasts, Politics, recession
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Posted by jackbassteam on December 8, 2012

http://amp2012.com/2012/12/08/economic-bears-turn-positive/

Nomura Forecasts A Market Spike Then A Dramatic Fall

English: A frame from a screencast from the US...

English: A frame from a screencast from the US House Financial Committee full committee hearing “An Examination of the Extraordinary Efforts by the Federal Reserve Bank to Provide Liquidity in the Current Financial Crisis which took place Tuesday, February 10, 2009, 1:00pm, 2128 Rayburn House Office Building. The frame shows Chairmen Ben Bernanke responding to a question posited by John E. Sweeney Full Committee (Photo credit: Wikipedia)

Nov 13

Nomura’s bearish macro strategist, Bob Janjuah, is out with his latest update on the stock market in nearly two months. 

Nothing has changed about his long-term view–he is still very pessimistic on markets and the economy.

However, Janjuah thinks we could see a major move higher in the over the medium term, owing to some sort of fiscal cliff deal that kicks the can and full-blown QE from the ECB.

Here’s what Janjuah has to say in his note:

If I look out 3-6 months I am open to the idea of one last parabolic spike higher in risk-on markets in this interim timeframe. I think we will eventually get fiscal and debt ceiling fudges in the US. Of course long-term credible solutions are needed, but are the most unlikely outcome.

Instead we may well be ‘forced’ to celebrate another round of horrible fudges which DO have a consequence. Namely, that the private sector continues to ignore Bernanke and the Washington elite (who between them continue to enjoy printing significant sums of money and/or spending way beyond their means) by instead doing the exact opposite, which means holding onto/building cash and savings, delaying spending/investment/hiring and thus hurting growth.

Markets will I think worry about these negative consequences eventually (see paragraph above), but in the interim the knee jerk reaction of markets to fiscal/debt ceiling fudges will likely be positive. Furthermore, and again on a 6 to 12 month interim timeframe, I think we could also see the ECB finally move to all out QE driven by another round of eurozone panic and driven in particular by the strong deflationary data trends that are emerging in the eurozone and which we in GMS think will get much stronger.

A combo of ECB QE and fiscal/debt ceiling fudges in the US – perhaps also complimented by a short-lived centrally planned but debt fuelled and ultimately wasteful China uptick – could even cause a parabolic spike powerful enough to take S&P – briefly – into the 1500s, before resuming the longer-term march over the rest of 2013 and 2014 to the 800s.

However, for the rest of 2012, in the short-term, Janjuah still remains bearish.

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by jackbassteam on November 13, 2012  •  Permalink
Posted in Bernanke, Central Banks, Economic Recovery, euro, Europe, Federal Reserve, forecasts, recession
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Posted by jackbassteam on November 13, 2012

http://amp2012.com/2012/11/13/nomura-forecasts-a-market-spike-then-a-dramatic-fall/

Barry Ridholtz Forecasts Stagflation – and a tough market ahead

Go Away Federal Reserve System!

Go Away Federal Reserve System! (Photo credit: r0b0r0b)

The market diary -results and predictions:

1)The Fed, ECB, BoE, BoJ and SNB will continue to print huge amounts of money, CHECK.

2)Earnings growth globally is slowing with GDP and we’ve seen the peak in profit margins, CHECK.

3)Election is over, DC doesn’t change, taxes are going up at exactly the wrong time, CHECK. An entry today: 1)stop saying “Uncertainty” as the only thing that is certain is uncertainty. 2)stop saying “fiscal cliff” as until market based solutions come to medicare, medicaid and social security, the can will get kicked all over the place and well passed any supposed ‘deal’ in the next two months. 3)Oh yeah, stop saying “kicking the can down the road.”

Bottom line, the stock market correction is not over, earnings will continue to slow, higher taxes of any kind in 2013 will bring a US recession, central banks will print more money (but can’t prevent a cyclical bear market after the near 3 yr bull run) and 2013 will be the most challenging both economically and from a market perspective that we’ve seen in a few yrs. Stagflation here we come is my call. Buy the flation and sell the stag.

Inflation means that gold will rise:

The Gold Investor’s Handbook – click here for  investment profits and much more detail on the ins and outs of investing in gold

and from Kiron Shankar

The European Court of Auditors reported, once again, the the EU made material errors in spending, amounting to 3.9% of its budget. The report will add to the pressure to limit the EU’s budget and will be good news for the Euro sceptics. The UK, in particular, wants a freeze (at worst) in the EU’s budget and the UK PM has little flexibility, given the recent Parliamentary vote (non binding) that he must obtain a cut in the EU budget, let alone a freeze. There is an increasing possibility that the UK will have a referendum as to its continued participation in the EU;

The UK PM meets Mrs Merkel today to try and agree on the EU budget ahead of the 22/23rd November meeting. The EU has proposed a rise of 6.0% in its 2014 to 2020 budget (they have suggested that EU countries cut back on their budgets, by the way), though Mr Cameron wants a freeze, at worst. The Germans have proposed that the EU budget is limited to 1.0% of the EU’s GDP;

The German’s plan of continuing to push austerity is unsustainable. As you know, I expect more pro growth policies, quite possibly as early as Q1 next year. The impact of fiscal multipliers is worsening the fiscal position of countries including Greece, Spain and Portugal and arguably France. This nonsense has to end. The clear downturn in Germany may well be the trigger for a change in policy

German September industrial production (seasonally adjusted) came in at -1.8% M/M, much worse than the -0.7% expected and -0.5% in August, which is yet another confirmation the recent weaker economic data, other than domestic consumption, which to date is holding up, though for how long;

The EU has forecast that the French economy will grow by +0.4% next year (half that forecast by the French) – personally, I expect the French economy to decline next year, especially if current policies are maintained. They added that whilst France should achieve its budget deficit target of -4.5% of GDP this year, it will be higher than the -3.0% next year (-3.5% expected). Personally, I believe that France will find it near impossible to meet even the -3.5% budget deficit forecast next year, based on current EZ policies. I continue to believe that France is the real big problem in the EZ, far more so than Italy (similar to Spain) – so long as the Italians deal with their political issues;

The EU forecasts that 2012 GDP will contract by -0.25% this year, with the EZ to decline by -0.4%. The EZ’s 2013 forecast has been slashed to just +0.1%, from +1.0% previously - still too optimistic, based on current policies. Inflation is expected to decline to +1.8% in 2013, in line with previous forecasts, with 2012 inflation at +2.5%, rather than +2.4% previously. They have raised the Spanish budget deficit to -8.0%, much higher than the -6.3% target. Basically, a much weaker EZ economy in 2013 – why is anyone surprised. Indeed, unless policies change, a much worse outcome is likely;

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by jackbassteam on November 8, 2012  •  Permalink
Posted in Economic Recovery, euro, Europe, Federal Reserve, forecasts, inflation, Interest Rates
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Posted by jackbassteam on November 8, 2012

http://amp2012.com/2012/11/08/barry-ridholtz-forecasts-stagflation-and-a-tough-market-ahead/

The Fiscal Cliff – Deficit Battles : No Easy Choices Or Results

Social Security Poster: old man

Social Security Poster: old man (Photo credit: Wikipedia)

Oct 23  John Mauldin

Massive deficits are projected for a very long time, unless we make major changes.

The problem is that taking away that deficit spending is going to have the reverse effect of the stimulus – a negative stimulus, if you will. Why? Because the economy is not growing fast enough to overcome the loss of that stimulus. We will notice it. It is the “G” component of the above equation, which was first developed by Irving Fisher during the Great Depression. The negative stimulus should be a short-term effect –most economists agree it will last 4-5 quarters – and then the economy may be better, with lower deficits and smaller government.

In order to get the deficit under control, we are talking about reducing the deficit on the order of 1% of GDP every year for 5-6 years. That is a very large headwind on growth, especially in a 2% Muddle Through economy. GDP for the US is now on an anemic 2% growth trend, with very weak final demand. Think what it would be if the full anticipated 2% of spending cuts and tax increases were put into force. It would be very hard to attain positive growth in 2013.

Furthermore, tax increases reduce GDP by anywhere from 1 to 3 times the size of the increase, depending on which academic study you favor. Large tax increases will inevitably reduce GDP and potential GDP. That may be the price we want to pay as a country, but we need to recognize that there will be a cost to growth and employment. Those who argue that taking away the Bush tax cuts will have no effect on the economy are simply not dealing with the facts, based on well-established research. Now, that is different from the argument that says we should allow the cuts to expire anyway.

Those who argue that reducing spending will also have an effect are equally correct. Government has been a large contributor to consumer income and therefore personal consumption, part of the “C” in the above equation (along with business consumption). The chart below, produced by Bridgewater last April, shows the additional effect of government spending on disposable income for the US consumer. Notice that without government support, disposable income would now be significantly lower. Letting the “one-time” Social Security stimulus (which has already been extended for two years) go away, along with extended unemployment benefits, will result in a decline in GDP of almost 1% and the loss of a significant contribution to disposable income.

There are no easy choices. If we do nothing about the deficit, we will quickly find ourselves close to the black hole of too much debt. Yet, trying to do too much too quickly will bring the economy perilously close to recession, which will mean increased government expenses and decreased revenues, making it hard to balance the budget. Forget Greece and Spain; ask the United Kingdom how well their austerity efforts are doing. This is a country making a serious and credible attempt to reduce their deficits, and sadly, they have fallen back into recession.

            No matter what economists with their models and politicians with their agendas will try to tell you, there is no “easy button.” While there may be a correct path to reducing the deficit and keeping us out of recession, that path is not going to be clear from the models. What we will hopefully do is get the direction correct and ease slowly into confronting the deficit-reduction facts. My thought is that if there are going to be tax increases and spending cuts, they should be phased in quarter by quarter. It might be better to simply hold the line on spending on all but essential items, cutting spending where possible to allow for spending growth in areas like health care. The bond market will behave as long as Congress defines a very clear and credible path to a manageable deficit.

            Both Republicans and Democrats will have to compromise. This election is primarily about the direction of the compromise. It is my sincere hope that both parties do not waste this crisis. There will be no better time to engage in comprehensive tax reform than the first six months of next year. True tax reform could actually be a significant stimulus to the economy and partially offset the drag of reducing the deficit. Tax reform in combination with a serious energy policy that encourages more rapid expansion of domestic production, plus control of health-care expenditures, will let us reduce the “fiscal multiplier” – especially important, given that monetary policy is severely constrained with interest rates at the zero bound.

            Finding the right policy mix will be difficult. There has to be deficit reduction each and every year, to be credible, but not so much as to push the economy into recession. Frankly, we will be lucky to find that right mix, given the nature of the political process. 

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by jackbassteam on October 23, 2012  •  Permalink
Posted in Federal Reserve, forecasts, Politics
Tagged , , , , , , ,

Posted by jackbassteam on October 23, 2012

http://amp2012.com/2012/10/23/the-fiscal-cliff-deficit-battles-no-easy-choices-or-results/

U.S. Housing -: No Recovery ? – A Subsidized Bounce

Wipe our Debt

Wipe our Debt (Photo credit: Images_of_Money)

October 21

Instead of actual responsible behavior of paying down debt, the primary if not only reason there has been any “deleveraging” at all at the US household level, is because of excess debt which became insurmountable, not because it was being paid down, the result of which is that more and more Americans are simply handing their keys in to the bank and walking away, and also explains why the US banking system is now practicing Foreclosure Stuffing, as defined first here, as the banks know too well, if all the housing inventory which is currently in the default pipeline were unleashed, it would rip off any floor below the US housing “recovery” which is not a recovery at all, but merely a subsidized bounce, as millions of units are held on the banks’ books in hopes that what limited inventory there is gets bid up so high the second housing bubble can be inflated before the first one has even fully burst.

hyperinflation

The Automatic Earth

Naturally, two concurrent housing bubbles can not happen, Bernanke‘s fondest wishes to the contrary notwithstanding, especially since as shown above, US households do not delever unless they actually file for bankruptcy, and in the process destroy their credit rating for years, making them ineligible for future debt for at least five years.

It is thus safe to say that all the other increasingly poorer US households [..] are merely adding on more and more debt in hopes of going out in a bankrupt blaze of glory just like everyone else: from their neighbors, to all “developed world” governments. And why not: after all this behavior is being endorsed by the Fed with both hands and feet.

The following graph from TD Securities ( through Sam Ro at BI ) makes a good case for the “subsidized bounce” definition Durden applies to the present US housing market. It’s no secret there’s a huge shadow inventory overhanging US housing, and now it comes out that those great new home numbers are not what everybody would like to think they are.

hyperinflation

The Automatic Earth

Many more houses are built than sold. And get shoved on top of the pile that’s already there, both the shadow inventory and the out of the closet one. Which begs the question: how long does a home stay in the “new” category? Does it take 1 year of staying empty for it to move to “existing”? 2 years, 3 years? 5? For one thing, builders and developers certainly have a huge incentive to continue to advertise it as new.

A graph from the same source:

hyperinflation

The Automatic Earth

How this constitutes a recovery I just can’t fathom. I think that is just something people would like so much to see that they actually see it. Moreover, there remains the issue that it’s very hard for most to comprehend what debt deflation is, what its dynamics are, and what consequences it has.

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by jackbassteam on October 21, 2012  •  Permalink
Posted in Federal Reserve, forecasts, Home builders, Hyperinflation, inflation
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Posted by jackbassteam on October 21, 2012

http://amp2012.com/2012/10/21/u-s-housing-no-recovery-a-subsidized-bounce/

Jim Rogers Forecasts ” Lost Decades for the U.S.”

English: American investor Jim Rogers in Madri...

English: American investor Jim Rogers in Madrid (Spain) during an interview. Español: El inversor norteamericano Jim Rogers en Madrid (España) durante una entrevista. (Photo credit: Wikipedia)

 OCTOBER 15, 2012 BY 

The period between 2000 and 2009 is often referred to as the “Lost Decade” for U.S. investing, as markets were barely able to scrape up any gains over the ten year stretch. But as we have moved on, and markets have recovered from the recession, the fear of a further and possibly deeper recession still persists. Some point to Bernanke and the Fed’s open-ended easing as our undoing, while other feel that our ever accumulating debts will eventually shock markets. Expert analysts and investors around the world have been quick to give their two cents,  and perhaps none have been more vocal or negative than Jim Rogers [for more economic news and analysis " FOLLOW" our free newsletter].

The legendary commodity investor has been down on the U.S. economy for quite some time as he feels that 2013 and 2014 will see markets slip into a deep recession. Now, Mr. Rogers has taken his claims a step further by claiming that the “Lost Decade” was not a one time anomaly for America. Rogers feels that we will suffer several lost decades, as he drew the comparison between our economy and that of Japan; one that has been well documented for years and years of poor market performance and a sputtering economy.

“The idea that you prop up people who are bankrupt is what Japan did. Japan had two lost decades, America will have a few lost decades” said Rogers. That kind of bearishness from a world-renown expert has some investors worrying, as if they weren’t already on the edge of their seats. Luckily, Rogers has been very vocal about which investments he sees performing well in the coming years, allowing those who follow his claims to protect themselves from the possibility of another lost decade [see also Jim Rogers Says: Buy Commodities Now, Or You’ll Hate Yourself Later].

Agriculture and farmland are by far Mr. Rogers’ favorite investments, and have been for some time. Investors can use the DB Agriculture Fund (DBA) and the Market Vectors-Agribusiness ETF (MOO) for exposure to agricultural futures and producers respectively. Rogers has also stated that he likes both gold and silver, but for the time being he favors silver over its precious metal counterpart. Investors can play the iShares Silver Trust (SLV) and the SPDR Gold Trust (GLD) to follow both of these ideas. Although, if we are truly headed for another few lost decades, placing money in the markets may be something you will avoid as an investor, especially with the unpredictable nature of today’s economy.

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by jackbassteam on October 16, 2012  •  Permalink
Posted in Federal Reserve, forecasts, Investments, Jim Rogers
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Posted by jackbassteam on October 16, 2012

http://amp2012.com/2012/10/16/jim-rogers-forecasts-lost-decades-for-the-u-s/

Gold Rally – What Rally ? Cannacord Updates Targets

English: 1 oz (Troy ounce) of fine gold Deutsc...

English: 1 oz (Troy ounce) of fine gold Deutsch: Eine Unze Feingold mit Zertifikat (Photo credit: Wikipedia)

Canaccord Nicholas Campell is particularly thankful that the U.S. Federal Reserve announced QE3. In his view, one of the key drivers of the gold price has been global U.S. dollar liquidity, which increased substantially in the last few years due to massive stimulus efforts to boost economic growth. His regression analysis (going back to mid-2000) illustrates an almost perfect correlation between the gold price and global U.S. dollar liquidity levels.

Based on his best-fit line, Campbell estimates that current levels support a gold price of US$1,690/oz. Despite massive government stimulus efforts, the global economic recovery has been materially slower than anticipated, which has led the U.S. Fed to introduce QE3, an open-ended additional round of quantitative easing via purchase of Mortgage Backed Securities (MBS) and bonds at the rate of US$40 billion per month, with no apparent end date. Campbell’s analysis further indicates that approximately $1 trillion in additional U.S. dollar liquidity (equivalent to approximately 24 months of the QE3 program) could potentially add another $220/oz to the gold price.

Campbell also sees support from low real interest rates and Eurozone sovereign debt concerns. As a result, on October 10, 2012, the Canaccord Genuity Metals and Mining group revised the peak gold/silver scenario to $2,000/$40 from $1,750/$35 for equity target price setting.

For earnings purposes, the Team also revised gold/silver price forecasts to $1,850/$36.50 (from $1,725/$34.00) in 2013, $1,950/$39 (from $1,650/$31/50) in 2014, and to $1,600/$29 (from $1,500/$27.50) in 2017 and beyond. As a side note, Campbell also indicated that it is an attractive season to hold gold. When examining performance YTD in 2012, we see that May was a low point for all commodities, with strong upward trends observed since then.

He believes that we will continue to see strong commodity performance in the period of October to January, as expected through a historically strong September – January season for precious metals prices based on 20 years of data.

 

 

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by jackbassteam on October 15, 2012  •  Permalink
Posted in Commodities, Federal Reserve, Gold, Precious Metals
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Posted by jackbassteam on October 15, 2012

http://amp2012.com/2012/10/15/gold-rally-what-rally-cannacord-updates-targets/

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