The Danger Of Easy Money and The QE Withdrawl

International Monetary Fund's Managing Directo...

International Monetary Fund’s Managing Director Dominique Strauss-Kahn (L) talks with , European Central Bank President Jean-Claude Trichet (C) and Italy’s Governor Mario Draghi (R) prior to the start of their G-7 meeting at the Istanbul Congress Center (Photo credit: Wikipedia)


Top Bankers: Too Much Central Bank Easing Is Becoming Dangerous

And the Stock Rally Is Due to Money-Printing

Everyone knows that “too big to fail” banks are bad for the economy. Indeed, even top bankers themselves say the big banks need to be broken up.

Now, top bankers are saying that the amount of liquidity which the central banks are flooding into the economy is becoming dangerous.

Agence France-Presse reports:

An influential group of leading world banks warned Thursday that central banks are pumping out too much easy money and markets risk becoming dangerously addicted to ultra-low interest rates.

The Institute of International Finance, which groups 450 banks, said that if central banks continue to flood money into the global economy, then any future bid to get it under control could itself destabilize the financial system.

***

“These conditions — quantitative easing, very low interest rates — cannot last forever, but the risk is that financial markets have become addicted to them,” it warned.

“The longer central bank liquidity is relied on to hold things together, the more excesses and distortions are being accumulated in the financial system. An eventual unwinding of these excesses will become a destabilizing risk event.”

***

IIF deputy managing director Hung Tran said that central bankers should be aware of “the unintended consequences of their actions” and make clear how they expect to adjust monetary policy over the long term.

“This would help lessen the risk of large swings in financial markets,” he said.

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

Link to The Big Picture

  • 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 economyModel 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 (transcripthandoutaudio), 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

 

 

 

 

 

 

QE Not Preventing Slowest Growth Since 2009 Recession

October 21

QE Ad Infinitum: Why QE is Not Reviving Growth
In a speech in November of 2002, Fed chairman Ben Bernanke made the now infamous statement, “the U.S. government has a technology, called the printing press, that allows it to produce as many U.S. dollars as it wishes essentially at no cost,” thus earning the nickname “Helicopter Ben“. Then, he was “confident that the Fed would take whatever means necessary to prevent significant deflation”, while admitting that “the effectiveness of anti-deflation policy would be significantly enhanced by cooperation between the monetary AND fiscal authorities.”

Five years after the 2008 financial crisis, Helicopter Ben undoubtedly has a greater appreciation for the issues the BoJ faced in the 1990s. The US 10-year treasury bond (as well as global bond) yields have been in a secular decline since 1980 and hit new historical lows after the crisis. What the bond market has been telling us even before the QE era is that bond investors expect even lower sustainable growth as well as ongoing disinflation/deflation, something that Helicopter Ben has been unable to eradicate despite unprecedented Fed balance sheet deployment.

A Broken Monetary Transfer Mechanism

Effective monetary policy is dependent on the function of what central bankers call the Monetary Transmission Mechanism, where “central bank policy-induced changes in the nominal money stock or the short-term nominal interest rate impact real economy variables such as aggregate output and employment, through the effects this monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and corporate balance sheets.”

Yet two monetary indicators, i.e., the money multiplier and the velocity of money clearly demonstrate that the plumbing of this monetary transmission mechanism is dysfunctional. In reality, the modern economy is driven by demand-determined credit, where money supply (M1, M2, M3) is just an arbitrary reflection of the credit circuit. As long as expectations in the real economy are not affected, increases in Fed-supplied money will simply be a swap of one zero-interest asset for another, no matter how much the monetary base increases. Thus the volume of credit is the real variable, not the size of QE or the monetary base.

Prior to 2001, the Bank of Japan repeatedly argued against quantitative easing, arguing that it would be ineffective in that the excess liquidity would simply be held by banks as excess reserves. They were forced into adopting QE between 2001 and 2006 through the greater expedient of ensuring the stability of the Japanese banking system. Japan’s QE did function to stabilize the banking system, but did not have any visible favorable impact on the real economy in terms of demand for credit. Despite a massive increase in bank reserves at the BoJ and a corresponding increase in base money, lending in the Japanese banking system did not increase because: a) Japanese banks were using the excess liquidity to repair their balance sheets and b) because both the banks and their corporate clients were trying to de-lever their balance sheets.

Further, instead of creating inflation, Japan experienced deflation, and these deflationary pressures continue today amidst tepid economic growth. This process of debt de-leveraging morphing into tepid long-term, deflationary growth with rapidly rising government debt is now referred to as “Japanification”.

Two Measures of Monetary Policy Effectiveness

(1) The Money Multiplier. The money multiplier is a measure of the maximum amount of commercial bank money (money in the economy) that can be created by a given unit of central bank money, i.e., the total amount of loans that commercial banks extend/create. Theoretically, it is the reciprocal of the reserve ratio, or the amount of total funds the banks are required to keep on hand to provide for possible deposit withdrawals.

Since September 2008, the quantity of reserves in the U.S. banking system has grown dramatically. Prior to the onset of the financial crisis, required reserves were about $40 billion and excess reserves were roughly $1.5 billion. Following the collapse of Lehman Brothers, excess reserves exploded, climbing to $1.6 trillion, or over 10X “normal” levels. While required reserves also over this period, this change was dwarfed by the large and unprecedented rise in excess reserves. In other words, because the monetary transfer mechanism plumbing is stopped-up, monetary stimulus merely results in a huge build-up of bank reserves held at the central bank.

hyperinflation

The Automatic Earth

If banks lend out close to the maximum allowed by their reserves, then the amount of commercial bank money equals the amount of central bank money provided times the money multiplier. However, if banks lend less than the maximum allowable according to their reserve ratio, they accumulate “excess” reserves, meaning the amount of commercial bank money being created is less than the central bank money being created. As is shown in the following FRED chart, the money multiplier collapsed during the 2008 financial crisis, plunging from from 1.5 to less than 0.8.

Further, there has been a consistent decline in the money multiplier from the mid-1980s prior to its collapse in 2008, which is similar to what happened in Japan. In Japan, this long-term decline in the money multiplier was attributable to a) deflationary expectations, and b) a rise in the ratio of cash in the non-financial sector. The gradual downtrend of the multiplier since 1980 has been a one-way street, reflecting a 20+ year dis-inflationary trend in the U.S. that turned into outright deflation in 2008.

hyperinflation

The Automatic Earth

(2) The Velocity of Money. The velocity of money is a measurement of the amount of economic activity associated with a given money supply, i.e., total Gross Domestic Product (GDP) divided by the Money Supply. This measurement also shows a marked slowdown in the amount of activity in the U.S. economy for the given amount of M2 money supply, i.e., increasingly more money is chasing the same level of output. During times of high inflation and prosperity, the velocity of money is high as the money supply is recycled from savings to loans to capital investment and consumption.

During periods of recession, the velocity of money falls as people and companies start saving and conserving. The FRED chart below also shows that the velocity of money in the U.S. has been consistently declining since before the IT bubble burst in January 2000—i.e., all the liquidity pumped into the system by the Fed from Y2K scare onward has basically been chasing its tail, leaving banks and corporates with more and more excess, unused cash that was not being re-cycled into the real economy.

hyperinflation

The Automatic Earth

Monetary Base Explosion Not Offsetting Collapsing Money Multiplier and Velocity

The wonkish explanation is BmV = PY, (where B = the monetary base, m = the money multiplier, V = velocity of money), PY is nominal GDP. In other words, the massive amounts of central bank monetary stimulus provided by the Fed and other central banks since the 2008 financial crisis have merely worked to offset the deflationary/recessionary impact of a collapsing money multiplier and velocity of money, but have not had a significant, lasting impact on nominal GDP or unemployment.

The only verifiable beneficial impact of QE, as in the case of Japan over a decade ago and the U.S. today is the stabilization of the banking system. But it is clear from the above measures and overall economic activity that monetary policy actions have been far less effective, and may even have been detrimental in terms of deflationary pressures by encouraging excess bank reserves. Until the money multiplier and velocity of money begin to re-expand, there will be no sustainable growth of credit, jobs, consumption, housing; i.e., real economic activity. By the same token, the speed of the recovery is dependent upon how rapidly the private sector cleanses their balance sheets of toxic assets.

QE falls into a black hole. And it leads into an – if possible even larger – black hole. Ben Bernanke and Mario Draghi have neither the power nor the tools to stop deleveraging and debt deflation. That’s just a myth they, and many with them who stand to benefit from that myth, like you to continue believing. It makes it all that much easier for them.

That surge in excess bank reserves (see the second graph above) comes from QE. It is your money, everyone’s money. And it does nothing to “heal” the economy you live in and depend on for your survival; it just takes away more of it all the time. That is the one thing Ben and Mario have power over: they can give money away that you will have to pay for down the line. They can lend it out to banks knowing that it will never be repaid, and not care one inch. Knowing meanwhile that you won’t either, because you don’t look at what’s down the line, you look at today, and today everything looks fine. Except for that graph, perhaps, but hey, how many people are there who understand what it says?

One thing Ben and Mario can not do, however, is create hyperinflation. They can’t even truly create any type of real inflation (which is money/credit supply x velocity vs goods and services), for that matter. They’re stuck as much as you yourself are in the dynamics of this bursting bubble.

QE 3 – The Chief Benefit – Raising Inflation

Liar Ben Bernanke

Liar Ben Bernanke (Photo credit: Ondrej Kloucek)

The Apprentice Millionaire Program Watchlists performed well after Ben Bernanke / The Fed announcements.

September 14,2012

The reality is that the quantitative easing is a spent force. What potential house buyer is moved to action if rates drop one-tenth of one per cent or even two-tenths. What employer will hire – regardless of bank rates , if there is no appreciable upturn in demand for his products.

Banks will have billions more in cash on deposit at the Fed because the demand remains sub-par .

Where then is the effect to be seen.

Resource stocks enjoyed a great end-of -the week because ultimately all those trillions will boost inflation. The place to save your portfolio and sanity is to own the oil, gold etc that will keep pace with real buying power .

Start with building your own safety net in a portfolio hedged against  the almost three  trillion dollar U.S. debt impacting assets denominated in U.S. dollars.

“I think the Fed will likely continue easing until it’s unequivocal that the unemployment rate is on a permanent downward trajectory and is no higher than the mid-to-low 7-per-cent range, accounting for a cyclical correction (up) in the labour force participation rate,” said senior economist Michael Gregory of BMO Nesbitt Burns.

“It will likely take sustained payroll job growth well above 200,000 [a month] to accomplish this, and some time to get there – perhaps by 2014 … The Fed is going to throw the veritable kitchen sink of policy measures at ensuring economic growth becomes both ‘substantial’ and ‘sustainable.’

The precious metal charts are forming bullish formations as their 50 day moving averages are moving to penetrate the 200 day moving average to the upside. Let us look at the gold miners (GDX). At $52 this has broken out and formed a strong bottom, our near term target is $60. The (GDXJ) is also breaking out at $24 and breaking through resistance.
Read our AMP Sector recommendations in your copy of  The Apprentice Millionaire Portfolio ( available at Amazon.com )

 
Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

Damn Inflation And Run The Printing Press ; Part 5678

Fed. Res. Board:  P. Warburg, J.S. Williams, W...

Fed. Res. Board: P. Warburg, J.S. Williams, W.G. Harding, A.C. Miller, C.S. Hamlin, W.G. McAdoo, Fred. Delano (LOC) (Photo credit: The Library of Congress)

Septemeber 2

for gold prtfolio ideas see www.ampgoldportfolio.com

Federal Reserve Bank of San Francisco President John Williams called for additional bond purchases by the Fed to spur economic growth that would be open- ended and total at least $600 billion.

High unemployment and inflation below the Fed’s 2 percent target “would argue for additional accommodation now,” Williams said today in an interview on Bloomberg Television from Jackson Hole, Wyoming. “I would like to see something that has a measurable effect on job growth. That would be arguing for a pretty large program” that’s “at least as large as QE2,” or the second round of quantitative easing, he said.

Federal Reserve Bank of San Francisco President John Williams called for additional bond purchases by the Fed to spur economic growth that would be open- ended and total at least $600 billion.

High unemployment and inflation below the Fed’s 2 percent target “would argue for additional accommodation now,” Williams said today in an interview on Bloomberg Television from Jackson Hole, Wyoming. “I would like to see something that has a measurable effect on job growth. That would be arguing for a pretty large program” that’s “at least as large as QE2,” or the second round of quantitative easing, he said.

Jonh Mauldin comments:

“No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future.”

– Ludwig von Mises

We heard from Bernanke today with his Jackson Hole speech. Not quite the fireworks of his speech ten years ago, but it does offer us a chance to contrast his thinking with that of another Federal Reserve official who just published a paper on the Dallas Federal Reserve website. Bernanke laid out the rationalization for his policy of ever more quantitative easing. But how effective is it? And are there unintended consequences we should be aware of? Why is it that the markets seem to positively salivate over the prospect of additional QE?

I missed the part where Congress gave the Fed a third mandate, to target the stock market. But Bernanke not only takes credit for the stock market, he points out that the rebound in the housing market is also due to Fed policy, because it fostered lower mortgage rates. Which it did. But let’s also remember that it was Fed policy that helped create the housing bubble to begin with. Which I don’t remember Bernanke taking credit for, even though he was on the Fed then and up to his eyeballs in supporting that policy.

Joan McCullough, in her own irreverent style, gave us a few must-read paragraphs this afternoon:

“And then [Bernanke] has the sand to make a public comment that stocks go up when he prints money because discount rates have gone down and the economic outlook has improved on account of it? This is what makes the hot dogs run stocks up the flagpole when The Bernank saddles up? Better economic outlook? Amazing.

Peter Schiff : Economy Has Sown The Seeds Of Its Own Destruction – Protect Yourself

Go Away Federal Reserve System!

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

August 6

The past week provided clear lessons not just in how central bankers have a limited ability to positively influence the economy but also how they are limited in their capacity to deliver the shortsighted policy actions that investors currently crave. The developments should provide new reasons for investors and economy watchers to abandon their faith in central bankers as super heroes capable of saving the economy.

The employment report released on Friday confirmed that the U.S. economy is stagnating at best and actively deteriorating at worst. While the numbers of jobs created in July was actually better than many economists expected, it was still far below the levels that would indicate a growing economy.  But more important than the official unemployment rate (which ticked up to 8.3%) or the number of jobs created, is the number of people who have left the workforce out of frustration or despair. This number continues to head higher. The labor force participation rate, which is the percentage of healthy working age Americans who actually have jobs, is at one of the lowest points since women first started working en masse in the 1970’s.  It’s also instructive to add back into the unemployment rate those who want full time jobs but who have had to settle for part time work. This figure, reported under the “U6” category, currently stands at 15.0%. This is just a 12% decline from the 17.1% high seen December 2009.  In contrast the “official” (U3) unemployment figure has declined 17% from its peak.

In explaining these bad results, most economists simply look at the stimulating effects of monetary and fiscal policy,not at the problems that those measures create. As a result, it is assumed that not enough stimulation, in the form of quantitative easing or federal deficit spending has been applied to the economy. The next logical assumption is that if the measures of the past few years had not been applied, we would have seen much weaker results over that time. In other words, no matter how bad things are now, defenders of the status quo will always describe how bad things “could have been” if the Fed hadn’t stepped in. This counterfactual argument gets increasingly threadbare as the years wear on.

Rather than admit that its policies have failed, the Fed statement last week gave all indications that it will continue with its current inflationary policy to the bitter end. These are the same errors that inflated the stock and real estate bubbles and ultimately resulted in the 2008 financial crisis and our continuing economic malaise. Without any fresh ideas,Fed press releases have become a Groundhog Day repetition of the same pronouncements and diagnoses. Oddly, many market watchers are frustrated that the Fed has not telegraphed that more stimulus is forthcoming. While it should be obvious that our current “recovery” is dependent on monetary support, it should be equally plain that the Fed can’t actually admit that fragility without spooking markets. To be clear, QE III is coming, but the markets should not expect Bernanke to supply a precise timetable.

Without question, if the Fed had not stimulated the economy with zero percent interest rates, two rounds of quantitative easing and operation twist, the initial economic contraction would have been sharper.  But such short-term pain would have been constructive.   By not taking away the cheap-money punch bowl, the Fed has delayed the pain and prolonged the party. But to what end?  So far all we have received is a tepid phony recovery that has sown the seeds of its own destruction.

In contrast, real economic restructuring would have resulted if the Fed had withdrawn its monetary props.  This would have paved the way for a robust, sustainable recovery.  Instead, the Fed helped numb the pain with unprecedented (and apparently permanent) liquidity injections. Its actions merely exacerbate the underlying imbalances that lie at the root of our structural problems, and thus act as a barrier to a real recovery.  So long as the Fed fails to learn from its prior mistakes, the phony recovery it has concocted will continue to fade until we find ourselves in an even deeper recession thanthe one we experienced in 2008.

Those who believe that artificially low interest rates are needed now,fail to see the price that will be paid down the road.  By keeping rates too low, the Fed continues to lead an overly indebted economy deeper into the financial abyss.  However, its ability to maintain rates at such low levels is not without limits.  Just as real estate prices could not stay high forever, interest rates cannot stay low forever.  When rates finally rise, the extent of the economic damage will finally be revealed.

The sad fact is that no matter how impotent and dishonest Fed officials become, their elected rivals on Capitol Hill (who control the fiscal side of the equation) have become even less significant.  The complete lack of any political conviction to take steps to confront our fiscal imbalances means that Ben Bernanke and his cohorts are seen as the only cavalry capable of riding to the rescue.  But no matter how often they blow their bugles,our economy will continue to deteriorate until we stop waiting for a savior and instead fight the battle for prosperity ourselves.


500 pages of Investing Strategy and Selections – All You Need To Succeed

Posted: August 4, 2012 | Author: | Filed under: AMP Books and Seminars | Tags: , , , , , , , | 1 Comment »

Are Your Investing Results Mediocre ?

You can make the change :

Ask yourself the hard questions – what are my expectations/ results and what must I do to change if the results aren’t what you want.

You don’t have to have a 500 page plan like that outlined in my book – but no plan is a plan for no success ( pardon the lack of grammar ).

How many books on investing did you read this year ?

What are you doing differently from last year ?

Don’t remain in denial – face your demons and move up to success .

 

All You Need To Succeed –

in 500 pages of Investing Strategy

and Selections Available now at Amazon .com

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

 

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today’s stock market [Paperback]

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Bill Gross of PIMCO : U.S. Nearing Recession / QE 3 – Goldman Forecast

In 1935, Cret designed the Seal of the Board o...

In 1935, Cret designed the Seal of the Board of Governors of the Federal Reserve System. (Photo credit: Wikipedia)

July 17

In his Twitter feed  the King of Bonds has  a sobering forecast:

Business Week  picked up the stiory and added the forecasts for The Fed to enter QE 3

Bill Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co., said the U.S. is approaching a recession as BlackRock Inc. (BLK) (BLK) expects the Federal Reserve to take more steps to support growth.

Five-year Treasury yields slid to a record 0.577 percent yesterday after an unexpected drop in U.S. retail sales rekindled speculation Fed Chairman Ben S. Bernanke will use testimony today to hint at further monetary easing. That followed data earlier this month showing American employers added fewer-than-estimated workers to payrolls. Goldman Sachs Group Inc. (GS) (GS) and Deutsche Bank AG cut forecasts for U.S. growth.

The U.S. is “approaching recession when measured by employment, retail sales, investment, and corporate profits,” Gross, who manages the $263 billion Pimco’s Total Return Fund (PTTRX) (PTTRX), wrote on Twitter yesterday.

Ten-year Treasury yields added one basis point to 1.48 percent as of 4:11 p.m. in Singapore, compared with the all-time low of 1.44 percent reached June 1. The MSCI World Index (MXWO) of shares rose 0.2 percent.

Bernanke will present his semi-annual monetary policy report to lawmakers in the Senate and House of Representatives today and tomorrow. He said on June 20 that the central bank will be prepared to take more steps, including additional asset purchases, if the labor market doesn’t improve continuously.

Everything ‘Weaker’

Retail sales fell 0.5 percent in June, figures from the Commerce Department showed yesterday, exceeding the most pessimistic forecast in a Bloomberg News survey. U.S. employment increased 80,000 last month, according to a Labor Department report, trailing the 100,000 increase projected by economists.

“Pretty much everything is way weaker,” Ewen Cameron Watt, chief investment strategist at the BlackRock Investment Institute, told reporters today in a teleconference from London. “There will be some more action from the Federal Reserve, but not probably dramatic action in a sense of massive stimulus.”

The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing from 2008 to 2011, seeking to cap borrowing costs and bolster the economy. Last month, it expanded the program known as Operation Twist that replaces short-term Treasuries in its portfolio with longer-term debt.

With U.S. debt yielding nears record lows, Treasuries are “already expensive,” Cameron-Watt said. The securities have returned 5.2 percent this year on an annualized basis, which would be the smallest yearly gain since 2009, according to a Bank of America Merrill Lynch index.

Goldman Forecast

A cooling job market is sapping household spending that makes up 70 percent of the economy, curbing sales at retailers such as Target Corp. (TGT) (TGT) and Macy’s Inc. Fed Bank of Kansas City President Esther George said yesterday the U.S. economy probably won’t grow much faster than 2 percent in 2012.

Goldman Sachs analysts led by Jan Hatzius cut their estimate for second-quarter economic growth to 1.1 percent from 1.3 percent, while Deutsche Bank chief U.S economist, Joseph LaVorgna, reduced his forecast to 1 percent from 1.4 percent.

“The sharp downward momentum in the economy” increases the probability of further Fed easing either in the form of another round of quantitative easing or other nonconventional measures, LaVorgna wrote in a note yesterday. “We need a couple of more weak employment reports, with figures near zero and with the unemployment rate increasing, for the Fed to undertake easing action.”

Fed’s George Says U.S. Growth May Not Exceed 2% in 2012

Federal Reserve Bank of Kansas City President Esther George said the U.S. economy probably won’t grow much faster than 2 percent this year, held back by caution among consumers and businesses.

The economy “is growing slowly for sure and some may characterize it as growing erratically,” George said today in a speech in Kansas City, Missouri. Growth will be “not much beyond 2 percent” in 2012, with some pickup in following years.

The Federal Open Market Committee voted last month to extend a program swapping short-term securities for long-term bonds in the Fed’s portfolio with the aim of bolstering a slowing U.S. economy and enlivening the job market. The Fed also said it would consider more stimulus if needed.

Policy makers face a “real challenge” in weighing whether more accommodative Fed policy will spur growth in employment, George said.

“We have provided a highly accommodative stance of monetary policy,” said George, who doesn’t have a vote on policy this year. “Will monetary policy put people back to work at this point? That is not clear to me.”

The U.S. recovery over the past three years has been marked by periods of solid growth followed by disappointing slowdowns, she said. “It looks like this summer’s slowdown will be no exception to that.”

Employment Weakness

Retail spending has waned, hurt by weakness in employment, the Kansas City Fed leader said. Businesses have raised their cash holdings and are reluctant to invest in part because of uncertainties including fiscal policy, the European debt crisis and the “regulatory landscape,” she said.

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RBC Predicts Bernanke Fed To Go to QE3 in June

President Barack Obama confers with Federal Re...

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

As long as growth in the U.S. economy continues to limp along, the Fed will remain in play and QE3 should become a reality at the central bank’s June 19–20 meeting, according to Tom Porcelli, chief U.S. economist at RBC Capital Markets.

This view is based on his expectation that first quarter GDP looks like it will come in close to 1%. Mr. Porcelli also noted that hiring remains anemic, global risks persist, and little is being done to stem the threat of a massive fiscal contraction by the end 2012.

Fed chairman Ben Bernanke recently stated that “a significant portion of the improvement in the labor market has reflected a decline in layoffs rather than an increase in hiring.”

Mr. Porcelli noted that hiring remains well below the lows of the last cycle and has been turning decidedly lower in recent months.

“Effectively, what the Chairman did is throw a bucket of cold water on the recent employment numbers,” the economist told clients. “This is significant given the fact that employment numbers have been among the limited group of data points that have actually looked somewhat decent.”

The persistent rise in gasoline prices could pose a dilemma for the Fed – keeping inflation above the Fed’s 2% target for longer than expected, but at the same time negatively impacting growth. While Mr. Bernanke acknowledged that climbing gas prices are “a major problem,” Mr. Porcelli suspects he is more concerned about the impact on economic activity.

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The economist believes the set-up couldn’t be better for the Fed to announced QE3 in June since Mr. Bernanke will hold a press conference after the meeting. This will give him an opportunity to make the case for the Fed’s decision.

The April meeting would likely be too soon as it comes ahead of the initial look at first quarter GDP, while a delay beyond June brings a potential move in July or September very close to U.S. elections in November.

Mr. Porcelli thinks the Fed will buy mortgage-backed securities, but expects the purchases will be smaller than both QE1 and QE2.

The 1.5% rally in equities on the day of Mr. Bernanke’s job speech suggests the initial reaction from investors will drive stocks higher. However, RBC believes the market reaction will probably be more muted than previous QE announcements.

“For one, the market has seen this movie before and thus has naturally developed some tolerance to the news. More importantly, though, there is a growing belief that QE has done little to help the economic backdrop,” Mr. Porcelli said. “From our perspective, the Fed has shown extreme willingness over the course of this lackluster recovery to act, and given the current backdrop and short-term outlook, it seems highly likely the Fed will not be content to sit on the sidelines.”

The Money Supply and Gold- Update

The Ascent of Money

The Ascent of Money (Photo credit: Earthworm)

 

Gold and Gold Equities

Last week, the US$ denominated bullion price fell $71.3/oz or 4.2% (high to low) in one trading session, taking the gold equities for an even more severe plunge, with the S&P TSX Global Gold index selling off 7.3% (high to low).

What was the main catalyst for the sell off in the bullion price?

 The US fed did not mention plans for further stimulus (i.e., QE3). With that news, and improved confidence in the state of the US economy, the market assumed the US$ should strengthen, which is ultimately negative for the bullion price.

Recently, Chinese government officials announced that they would be cutting their growth target for 2012 to 7.5% from 8.0%. It is assumed that China could be on track for its slowest growth in the last decade. Adding fuel to the fire, China’s trade balance dropped $31.5 billion into negative territory in February as imports outpaced exports. With this news, the Yuan devalued against the US$, further boosting US$ strength.

The best correlation to the US$ denominated bullion price has been global money supply. With the combination of easing monetary policies, and government led quantitative easing (printing money), the overall money supply increase has led to devaluation of fiat currencies, including the US$, and ultimately a rise in bullion prices.

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