Did Feds QE program create what it intended create? Where is the job creation and the confidence in the prosperous economy? After QE ends in June, Fed will need to decide of what to do next.

“The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.

“These actions had the expected effects on markets and are thereby providing significant support to job creation and the economy,” Mr. Bernanke said in a February speech, an argument he has repeated frequently.

But growth remains slow, jobs remain scarce, and with the debt purchases scheduled to end in June, the Fed must now decide what comes next.” (NYT)

http://www.nytimes.com/2011/04/24/business/economy/24fed.html?_r=1&hp

Easter vacations surprise for the mega bulls. China should reduce its excessive foreign exchange and further diversify its holdings according to Tang Shuangning, chairman of China Everbright Group.

China’s foreign exchange reserves increased by $197.4 billion in the first three months of this year to $3.04 trillion by the end of March, but according to Tang these should be between 800 bill-1.3 trillion Usd.

“Tang also said that China should further diversify its foreign exchange holdings. He suggested five channels for using the reserves, including replenishing State-owned capital in key sectors and enterprises, purchasing strategic resources, expanding overseas investment, issuing foreign bonds and improving national welfare in areas like education and health. “(Chinadaily)

Who will be the buyer of all these bond sales if not the mighty Fed?

http://www.chinadaily.com.cn/china/2011-04/24/content_12382023.htm

We posted this must read volatility report some weeks ago. Vix index is plunging again, and the same market forces are in play. We are still climbing the wall of worry. Artemis vol report below is great Easter vacations reading, where complex issues are explained in a simple way. Follow the link below,

artemis volreport

“Let fly the black swans! Every last one of them! This bull market appears capable of absorbing any shock, even headlines straight from the Old Testament: tsunamis, twisters, blizzards, revolutions, droughts, sovereign bankruptcies—you name it. All are met with the cockeyed optimism of nurse Nellie Forbush.”

“The fact is, we’ve always resolved debt-ceiling conflicts in the past,” says Rob Shapiro, a former Clinton advisor who now is chairman of Sonecon, an economic consulting firm in Washington, D.C. Investors, says the Democrat, expect this will happen again: “We always start where we are now, with both parties refusing to accept the bottom line of the other side. The Republicans say they never will accept a tax increase. The Democrats say they never will accept any significant change in entitlements, especially Social Security.” (Barrons)

What’s going on with the silver prices? Silver is now outperforming every asset and the chart looks parabolic. The squeeze is there, and some big players are suffering as their shorts just keep on going up. Are we building a future silver bubble?

“During the past week, silver ETF assets showed a 23% increase from just three weeks ago, according to Jason Zweig in hisweekend WSJ column.

The growth in assets came as popular funds such as the iShares Gold Trust (SLV) and the ETFS Physical Silver Shares (SIVR) continued to generate greater returns.

As a result, almost 90 million shares of SLV traded on Wednesday alone, notes Zweig.

But he warns that such heady activity may come with some dark clouds lingering overhead.” (Barrons)

http://blogs.barrons.com/focusonfunds/?mod=BOL_hpp_blog_etf

We hear about the Vix index on a daily basis. Sometimes it is the fear index, but according to some CNBC contributors, that have not traded options professionally, it is not the fear factor anymore.We find this a somewhat amusing statement. Vix is measuring some dimensions of volatility, but not all aspects of the complex area of volatility trading. Steepness of the curve, skewness and other measures are important in judging the volatility and it’s implications for the market. The relatively steep term structure, and a rather high skew (although it has dropped some lately) is telling us there is some worry in the market, although we call it the “wall of worry”. Since QE2 we have seen the volatility, Vix and other measures change, but will this come back to a mean reversion again, where market participants don’t rely on the Bernanke put at all times? Anybody, with a big book, like the Fed, could easily be flooding the market with volatility, depressing the vol, and therefore creating a less volatile environment, where market participants, start believing in this new normal of slowly rising equity prices with low volume. This might create a a false sense of security, especially with Vix index falling further.

Many of the inputs in trying to determine future vol, is looking at past vol. When we get the low vol into the models, and base historic vol on mostly low levels of vol, we end up living in the belief that vol is low and here to stay. A sudden black swan event, might change all that over night. Considering the models don’t take into account the low liquidity and volumes in the market, people also misjudge the possibility of effective hedging of their short vol strategies. As Nassim Taleb said, “don’t buy vol when you have to, buy it when you can”. Remember Goldman’s quant desk blowing up in 2008?

Barrons on Vix,

http://online.barrons.com/article/SB50001424052970203583604576271092094517266.html?mod=BOL_hpp_dc

FOMC meeting coming up on Tuesday and Wednesday. Below are some points to watch out for. This first “open” dialog will probably be a test version of Feds new communication. Fed will probably talk of QE2 ending in June, and expect some vague comments of a potential rate rise in 2012 at the earliest.

(Table, Calculatedrisk)

What might Bernanke say? according to Market Watch,

http://www.marketwatch.com/story/questions-and-answers-for-bernanke-2011-04-22

According to Bernanke rising commodities prices are of no great concern. Oil prices will eventually come down to some kind of mean reverting average. Oil at 80 seems far away, and the American consumer is feeling the pinch. Looking at the DXY index, as the Usd is plunging, there seems to be little hope of falling oil prices in near term. The financial part, SPX futures, of the economy seems to be doing great, but the average Joe is getting less gas for the buck. Obamas popularity is diminishing by every new rise in gas prices. The masses don’t care about long term fixes of the economy, they ant to drive their cars, especially with peak driving season coming up.

“Obama is feeling the heat from gasoline prices that are about $4 a gallon and may surge higher. A New York Times-CBS News poll found that 70 percent of Americans believe the country is on the wrong track and analysts believe gas prices are a main reason.

The president devoted his weekly radio and Internet address to outlining his views on the U.S. energy predicament, saying clean energy is ultimately the way forward for a country long addicted to gas-guzzling vehicles.

“Now, whenever gas prices shoot up, like clockwork, you see politicians racing to the cameras, waving three-point plans for $2 gas. You see people trying to grab headlines or score a few points. The truth is, there’s no silver bullet that can bring down gas prices right away,” he said. (Reuters)

http://www.reuters.com/article/2011/04/23/us-obama-energy-idUSTRE73M10820110423

The situation in China escalated somewhat with regards to the truckers demands, and anger due to soaring gas prices. The world’s most populous nation is getting rather aware of the inflation situation, and wishes at no expense increased violence due to unhappy protesters. Is the Jasmine revolution getting closer?

Shanghai container-truck drivers were reported to have won cuts in port fees after a sometimes violent protest against rising costs highlighted the risk of inflation triggering unrest in the world’s most populous nation.

The local government will lower or remove some fees after drivers stopped work on April 20 because of the levies and increased fuel costs, Xinhua News Agency reported, citing an unidentified spokesman. The city’s ports are operating normally, the report said. (Bloomberg)

http://www.bloomberg.com/news/2011-04-23/shanghai-cuts-fees-for-truckers-following-strike-xinhua-says.html