Guest post by Azizonomics.
A number of economists and economics writers have considered the possibility of allowing the Federal Reserve to drop interest rates below zero in order to make holding onto money costlier and encouraging individuals and firms to spend, spend, spend.
Miles Kimball details one such plan:
The US Federal Reserve’s new determination to keep buying mortgage-backed securities until the economy gets better, better known as quantitative easing, is controversial. Although a few commentators don’t think the economy needs any more stimulus, many others are unnerved because the Fed is using untested tools. (For example, see Michael Snyder’s collection of “10 Shocking Quotes About What QE3 Is Going To Do To America.”) Normally the Fed simply lowers short-term interest rates (and in particular the federal funds rate at which banks lend to each other overnight) by purchasing three-month Treasury bills. But it has basically hit the floor on the federal funds rate. If the Fed could lower the federal funds rate as far as chairman Ben Bernanke and his colleagues wanted, it would be much less controversial. The monetary policy cognoscenti would be comfortable with a tool they know well, and those who don’t understand monetary policy as well would be more likely to trust that the Fed knew what it was doing. By contrast, buying large quantities of long-term government bonds or mortgage-backed securities is seen as exotic and threatening by monetary policy outsiders; and it gives monetary policy insiders the uneasy feeling that they don’t know their footing and could fall into some unexpected crevasse at any time.
Majority think they know what money is, but after reading this, they understand they were wrong. Essential reading (including the links). Via Golem XIV.
There is a particular scene in the film “It’s a wonderful life” in which the hero of the story is trying to prevent a run on the Bailey Savings and Loan. In an effort to calm the anxious savers wanting to withdraw their money George Bailey cries out “you’ve got it all wrong, the money’s not here, well your money’s in Joe’s house, that’s right next to yours, and the Kennedy house and Mrs Maitland’s house and a hundred others”.
As films go it is a genuine classic. But unfortunately it has perhaps unwittingly perpetuated a whopping misrepresentation of how banks actually work; a little white lie that the IMF have recently just driven a sledgehammer right through.
Their working paper, titled “The Chicago Plan revisited”, seems to have slipped under the mainstream media attention (and most of ours!) during the summer lull. That is until Ambrose Evans-Pritchard of the Telegraph picked it up a few weeks ago. At the core of the IMF paper is a deep seated analysis of how banks actually function in the economy and their role in the money supply. It is nothing short of revolutionary in that the paper gives full acknowledgement of, and support for, an intellectual movement that has doggedly criticised the very nature of money. Criticism that has so far been completely ignored and dismissed by mainstream economics.
Market commentary by Hussman of Hussman Funds.
In mid-September, our estimates of prospective market return/risk dropped to the lowest figure we’ve observed in a century of market history (see Low Water Mark). That week turned out to be the high of the recent bull market, though it’s certainly too early to establish whether that was the ultimate peak. During the recent correction, I’ve noted a modest improvement in our return/risk estimates – which focus on a blended horizon looking out from 2-weeks to about 18-months. However, last week, the stock market experienced some significant damage to internals (breadth, leadership, price/volume measures, etc). As a result, our estimates of prospective return/risk have plunged lower again, to what is now the second most negative figure we’ve observed in a century of data – the September 14, 2012 weekly close of 1465.77 continues to mark the most negative estimate.
My intent in these weekly comments has always been to share what I am looking at, and what our analysis of the economy and financial market suggests – based on extensive historical data and every analytical tool we can bring to bear. There is no need to present the case as any better or worse than it is, but the simple fact is that our return/risk estimates for stocks dropped into the most negative 1% of historical data way back in March of this year, and the estimates we’ve seen since September have been even more extreme.
The S&P 500 has now underperformed Treasury bills for nearly 14 years, including dividends. The cycle since 2007 has been extraordinary in its economic, monetary and fiscal characteristics, not to mention the need to contemplate Depression-era data along the way. It’s undoubtedly easier to dismiss my present concerns as the rantings of a permabear than to understand the narrative of this particular market cycle. But for the benefit of those who do, I want to share my view that the statistical risk of severe market outcomes, given present observable data, has almost never been worse.
Having recently uncovered in its own research that quantitative easing is enriching the richest 5%, and the British economy still mired in the doldrums even in spite of hundreds of billions of easing, the Bank of England announced last week that it was grounding its fleet of helicopters dropping cash onto the big banks and suspending the quantitative easing program.
Yet, this may not be the end for British monetary activism.
This week an even more radical debate burst into the open in Britain. Sir Mervyn King, governor of the Bank of England, found himself fighting a rearguard action against a groundswell of support for “dropping money from helicopters” – something proposed by Milton Friedman in 1969 as the ultimate cure for intractable economic depressions and recently described in this column as “Quantitative Easing for the People.”
With Gold showing relative strength during this week’s risk off, we would like you to remind the real reasons behind buying Gold. Courtesy SK Options.
Gold serves numerous functions as an investment. Traditional reasons for investing in gold include:
- Investment market declines
- Burgeoning national debt
- Currency failure
- War or other extreme events
- Social unrest
Some would argue these entire phenomenon are related. For instance investment market declines can lead to war which can be followed by inflation which can lead to currency failure – just look to Germany in the 1920s for proof of this (albeit in a mixed order of events).
Basically, gold is protection against various ugly or undesirable societal, political, economic and financial occurrences. That reasoning broadly explains gold’s rise from $650 in 2007 to approximately $1800 today. Gold has risen over the last few years on the back of uncertainty and weakness in major global economies.
But of all the reasons given to invest in gold, the most common traditionally and the one we hear most often is protection against inflation. Inflation is often a consequence of increases in the supply of money that don’t coincide with an increase in the output of goods and services – basically, higher prices as a result of excess money competing for a fixed number of goods.
Mohamed El-Erian, chief executive officer of Pacific Investment Management Company, gives his opinion on the fiscal cliff, the global economy, and an uncertain economy.
When it comes to sleepless nights, Toimi Soini of Finland originally set the record by using the “toothpicks under the eyelids” method for 11 straight days. In hindsight, Toimi was an amateur. You wouldn’t know it, but the nice people running the Bank of Canada have gone sleepless since 2003 – that’s 3,564 days without sweet dreams. Yet, that’s nothing compared to the very private folks at the Swiss National Bank. These super-secretive bankers have surpassed over 4,660 sleepless nights – despite living in Zzzzzzurich. This, of course brings us to the World record for sleepless nights. At 5,025 nights and counting, the always polite and well dressed chaps over at the Bank of England are reigning champions. Toimi Soini was not a banker and this was his downfall. As for the Canadians, Swiss and British – yes they are all bankers, but not just any bankers. This terrific trio have the displeasure of forever being known as the bankers who sold their gold. The irony of course, is the action of the World’s central bankersthemselves is the reason why gold is destined to remain golden forsometime to come. And with gold sitting near $1700/oz, and with noend to the money printing games, the sleepless nights are destined tocontinue.
Guest post by Peter Tchir.
From Risk Off to Risk Neutral
Until Friday of last week, we had been in a risk off stance. We had believed that the market was too optimistic about what immediate impact QE would have and that too many had over-estimated how eager Europe was to proceed with new and bigger bailouts. Those all helped our view, but in the end, earnings turned out far worse than most were expecting. The earnings story has been a drag on the market for the first time in recent memory. Even Apple struggled. The outlooks were even gloomier than the actual results.
So why are we switching from Risk Off to Risk Neutral or even Risk On?
First, S&P 1,400 helps. We believe the range on this downside move had been 1,375 to 1,400 so there is still some room lower, but we hit levels that make sense for us to look for a reversal. Then there is Apple. For the first time in a long time, I can see some strength building for Apple. Maybe we will get more profit taking, but given their earnings, the cash on hand, and the magic of round numbers, right around $600 seems like we could see some support and new investors who missed the surge to $700, step in and take a shot. Apple is so large in the Nasdaq, the Nasdaq 100 (QQQ) that it alone can drive the indices. Even the S&P is affected directly and indirectly by Apple.
In this episode, Max Keiser and Stacy Herbert discuss the Bobo and Gono global central banking clown show featuring Ben Bernanke and Gideon Gono and their crowd pleasing echo bubble gags and hyperinflationary squirting money printing flowers. In the second half of the show, Max Keiser talks to Jim Rickards, author of CURRENCY WARS, about Ben Bernanke’s speech in Japan where America’s chief currency warrior warned emerging economies to appreciate their currencies or suffer inflation. Rickards also notes it could be the first time the head of the Federal Reserve has ever talked about the US dollar, normally the domain of the US Treasury.
Guest post by Peter Tchir.
CDS Lagging for First Time in Awhile
Yesterday in particular was a huge outperformance for CDS. Spanish bonds were more than 30 bps tighter across the board. That lead to a major squeeze in all the CDS indices.
Yet this morning, SNR FINS in Europe is 5 wider, MAIN is 3 wider, and even IG19 is back to 91 from a low of 89.25 yesterday. IG19 is back to about 4 bps rich to fair value, another sign that yesterday’s capitulation lower was driven by pain and fast money rather than specific credit selection.
On the bond side, Spain has been able to eke out small gains so far, but Italian bonds are definitely weak, particularly the front end.
What will the “bailout” rate be?
It seems a certainty that Spain will ask for and receive a bailout package. The “conditionality” will be a key issue. How onerous will the terms meet and what will the ongoing tests be? If the tests are strict and quarterly, Spain may not receive much money at all. I think the terms will be far less draconian than for Greece but tough enough that the market will be uncertain about the longevity of the program.
Asides from the conditionality, what will the rate be? Amazingly, there seems to be very little conjecture on that. Knowing that Spain will get a credit line and that the ECB will initiate OMT is great, but at some point the rate matters. It certainly matters for Spanish bonds.