Sunday, December 26, 2010

The Economics of Inflation

If anyone is interested in learning the details of the great post World War I German hyperinflaiton, they should read at this book.  It is the seminal text on the matter and covers the details of events leading up to the hyperinflation, its causes and of particular interest to me, the social effects - ie, who lost most from the inflaiton and who benefitted.....


It was written in the decade following the events described, and is  incredibly detailed, including a wide array of detailed economic and monetary statistics - inedeed it is more of a text book than a narrative that you would find these days - you must have a strong desire to understand the subject matter, but it is well worth it.


It is hard to believe that hyperinflation could occur in any advanced economy today, particularly with well-documented events of hyperinflation and its horrible results, such as those describedin this book --- however, it seems that the lessons of the German hyperinflaiton (and the high inflations in 1980s Latin America) are not widely understood at all (perhaps QE I & II may end up being examples of this lack of understanding, it remains to be seen).


So, who were the losers?  The "rentiers' or those small business owners, property owners, retirees who had monetary assets....and workers whose wages were not linked to inflaiton...


Who were the winners?  Some large industrialists who owned or had access to foreign assets, currencies, raw material production or importation, speculators (opportunists who had the foresight and flexibility to move monetary assets out of paper currency), farmers (who had mortgage debt which became worthless and who had the flexibility to use earnings from production for machinery, labor and other input purchases).


Take note -- equities did not maintain their value vs the inflation.  Of course, bond investors and those in cash lost it all......

Enjoy !

Tuesday, November 23, 2010

Adding More Positions

Increased the long equities by 5% (mostly Asian ETFs particularly Singapore):
 
Still modestly long equities approx. net 10%, gross 35%

Longs in:
Asian ETFs - 10%
Pharma - 5%
Telecom - 2.5%
Agriculture - 2.5%
Oil, Gas, Industrials - 5%
Tech - 5%
 

Mar 11 AUD 2%
Mar 11 CAD 2%
Mar 11 Gold 2% 
Dec 11 Corn 1%

 
Forward PE's on the individual longs are approximately 11x.

ETF PE's are a bit higher, however, this trade is more about currency devaluation rather than valuation per se.

To the extent there is a correction, will be adding to the long equity side and possibly the FX side.
 
Still expecting EUR to test 1.329-ish level.

 

Friday, November 19, 2010

Bernanke's Defense of Debt Monetization (ie, Quantitive Easing)

All in all the Fed Chairman's speech is supportive of a weak dollar policy prominent among U.S. government officials, but hitherto unexpressed explicitly....bottom line - keep exposure to fx of resource rich countries and keep long Non-U.S. equities vs short U.S. equities...

Although commentators do not appear surprised by the contents of Bernanke's Frankfurt speech (full text in the link below), I was shocked to read what can only be described as a rather open attack on surplus countries seeking stable exchange rates, and an ode to a weaker dollar.

To start, he states that U.S. debt monetization is "appropriate" because it is a "stimulus" measure as though this were a fact, even though the stated aims of asset inflation are unproven and it is unpredictable as to where the excess liquidity from this exercise will end up (ie, will it end up driving commodity prices higher?).

Additionally, there is a direct reference to the monetization's effect on the U.S. dollar, I believe for the first time:  
"The resulting increase in emerging market interest rates relative to those in the advanced economies would naturally lead to increased capital flows from advanced to emerging economies and, consequently, to currency appreciation in emerging market economies."

However, even though the U.S. is reducing interest rates and thereby lowering the value of its currency, the fault all lies with emerging market countries (ie, China):
"An important driver of the rapid capital inflows to some emerging markets is incomplete adjustment of exchange rates in those economies, which leads investors to anticipate additional returns arising from expected exchange rate appreciation. The exchange rate adjustment is incomplete, in part, because the authorities in some emerging market economies have intervened in foreign exchange markets to prevent or slow the appreciation of their currencies."

Ok - so basically, printing money to buy government bonds to "stimulate" the U.S. economy is ok and not currency manipulation meant to drive down the value of the dollar while emerging market fx stabalization policies are currency manipulation....

Is there any wonder that there is dismay among foreign central bankers at this policy?

Finally, David Rosenberg of Gluskin Sheff has an interesting take, and points out that Bernanke's remarks are entering the political relm.....

So much for Fed independence, the money printing policy very much puts this in the political relm...

From David Rosenberg, Gluskin Sheff:
"Ben Bernanke delivered a speech today in Frankfurt where he pointed the finger at China as a source of global imblance (never mind that the U.S. dollar has collapsed 70% against the yen since I joined the business in the mid-80s and the bilateral trade deficit with Japan hasn't come down one ioata.  Maybe a good part of the imbalance is a U.S. tax code that massively promotes consumption at the expense of savings.)

As an aside, Mr. Bernanke's subtle approval of President Obama's fiscal policies in today's sermon is sure to draw the ire of the new GOP-dominated Congress."

Link to the Full Text of Bernanke's Speech in Frankfurt 19 November 2010

Thursday, November 18, 2010

Russell Reynolds 2010 Asset & Wealth Management Trends Report

Interesting report on the state of the wealth management industry from Russell Reynolds, particularly the hedge fund portion of the report...

Interestingly, if the statement below is true, then investors should take heart and go all-in, risk-on...!  Personally, I do not buy it...

"Many investors see current market levels as temporary rather than indicative of a trend, liabilities now significantly outstrip assets and return assumptions far exceed reality. The inflation vs. deflation debate rages on. Indeed, the basis for allocating across a basket of non-correlated assets no longer is an investment cornerstone."

Russell Reynolds 2010 Asset & Wealth Management Trends Report

Wednesday, November 17, 2010

China vs Corn & Beans

I am not at all sure how China can curb the market price of corn.  Yes, they can control the price of corn that their farmers pay through price controls, however, if they need to import corn to satisfy demand, they the Chinese government would lose money subsidizing it by paying a higher price for imports and receiving a lower price from domestic consumers...


Once there is more clarity on the Ireland situation, I would say that corn, and perhaps beans should resume their upward trends - unless China stops buying, produces more, I cannot comprehend how this would not be so considering the supply situation... 

From Bloomberg:

Corn and soybeans fell to five-week lows in Chicago on concern that demand may wane as China, the biggest consumer of commodities, moves to limit speculation and inflation.
China is drafting measures to curb excessive price gains, Premier Wen Jiabao said yesterday, suggesting possible interest- rate increases and price controls. The Dalian exchange last week said it will curb “abnormal” trading to prevent price manipulation. The dollar has gained in two of the past three sessions, curbing demand for U.S. crops.


“Talk of China curbing speculation and a stronger dollar is working against the ags,” said Luke Chandler, global head of agricultural-markets research for Rabobank in London. “We still remain supportive of the grain markets. There’s just some momentum to the downside.”

The rest from Bloomberg:
Corn, Soybeans Slide to Five-Week Lows as China Moves to Limit Inflation

Tuesday, November 16, 2010

Adding Some Positions


Added 2% positions today in the following:

AUD
CAD
Gold

Still modestly long equities approx. net 5%, gross 25%

Longs in:
Asian ETFs - 5%
Pharma - 5%
Telecom - 2.5%
Agriculture - 2.5%
Oil, Gas, Industrials - 5%
Tech - 5%

Forward PE's on the individual longs are approximately 11x.

ETF PE's are a bit higher, however, this trade is more about currency devaluation rather than valuation per se.

To the extent there is a correction, will be adding to the long equity side and possibly the FX side.

Missed the EUR correction, but would expect a rebound off the 100 day average of 1.3238....



Monday, November 15, 2010

From the Wall Street Journal Blog, an open letter to Ben Bernanke....


Should there ever be a QE3, 4, etc., perhaps we may look back on this letter as the first "cry from the wilderness".  Also, note the signatories...and the robotic reply from the Fed bureaucracy...
"The following is the text of an open letter to Federal Reserve Chairman Ben Bernanke signed by several economists, along with investors and political strategists, most of them close to Republicans:
We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued.  We do not believe such a plan is necessary or advisable under current circumstances.  The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.
We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.”  In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.
We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.
The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems."

From the Wall Street Journal Blog:
Open Letter to Ben Bernanke

Friday, November 12, 2010

Nothing is as Permanent as Things Called "Temporary" (Nassim Taleb)

In this video, Nassim Taleb's clear articulation of the effects of the U.S. government's policies regarding money printing and those affected by it are rather blunt and clearly welcome. 

His visible agitation throughout this interview, when discussing former Fed officials, his views on the morality of U.S. fiscal and monetary policy and also recalling his experiences with inflation in Lebanon is telling...

In my conversations with Latin Americans who have moved to the U.S., I hear similar views regarding monetary policy and 'stability'...they wonder how the U.S., which when they emigrated was considered the beacon of stability, could have fiscal and monetary policies reminiscent of the countries they fled...

Fund Managers Beware: Dodd-Frank Has Provided for "Bounties" for Whistleblowers

Regulations on whistleblower "bounty" provisions have been released....

The fact that there is now an institutionalized bounty system at all is surprising, indeed a bit shocking.  If this works, will there be new 'bounties' in future, say for ratting out your doctor, accountant, neighbor, or wife ?

All you whistleblowers note:  before you blow the whistle, it looks like you will need to spend quite a bit of time consulting with an attorney to determine the chances that you will actually be compensated by the SEC, because this regulation is definitely not straightforward...

Dodd-Frank Whistleblower Bounty Provisions

Who Wants to Jump in Front of This Train?

Update: Governor Schwarzenegger calls emergency budget session...
Schwarzenegger declares California fiscal emergency (Reuters)

The ishares AMT-free municipal bond fund chart is looking a bit like a cliff.....no idea why, but it cannot be a positive omen....

Any thoughts on this are appreciated...

Thursday, November 11, 2010

Are Stocks "Dangerously Overpriced?

It is interesting when a long-only manager says that stocks are over-valued and may become even more over-valued...


Is he just talking his book lower so he can buy?  


He is right that stocks will 'crack', however.  Those old enough to recall the 1987 crash may remember that one of the possible catalysts for the crash was when James Baker, the treasury secretary, while in Germany expressed the need for a cheaper dollar...the Treasury today has been mostly silent or dismissive when discussing the dollar - if this changes, there would be good cause to look out below!  

Grantham Says Fed Asset Purchases May Make Stocks 'Dangerously Overpriced'

From Bloomberg News:

Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co., said the Federal Reserve’s attempt to boost the economy could push U.S. stocks to a level where they will be “dangerously overpriced.”
The Fed’s decision to purchase Treasuries and flood markets with cheap money will drive investors out of cash and encourage them to speculate in stocks, which are already overvalued, Grantham, 72, said today in an interview with the CNBC cable television network. He put the fair value of theStandard & Poor’s 500 at 900. The index closed yesterday at 1218.71.
“The S&P is already overpriced and if you push it up another 20 percent it becomes dangerously overpriced,” Grantham said in the interview. “In the not-too-distant future stocks will crack again.”
Grantham accurately predicted in 2000 that U.S. stocks would lose money in the coming decade. The S&P 500 lost an average of 1 percent a year in the 10 years ended Dec. 31, 2009.
Boston-based Grantham Mayo managed more than $94 billion as of June 30, according to the company’s website.

Clash of the Titans (?)

Geithner vs. Greenspan....who do you believe?


I hate to admit it but I lean more towards Greenspan these days, although I will never understand why he ever would have touted adjustable rate mortgages as a good idea for ordinary borrowers....


In reading the excerpt below, remember from English class, anything after the word "but" negates what went before it.....


From Bloomberg News:

Geithner Says Dollar Drop Due to Haven-Flow Reversal


Treasury Secretary Timothy F. Geithner said the dollar’s drop in recent months is due to a reversal in safe-haven capital flows, rebutting former Federal Reserve Chairman Alan Greenspan’s assessment of U.S. policy.
Investors are no longer seeking as much of a refuge in dollars, and that’s “a sign of greater confidence that although we face challenges in the U.S. and globally the risks we face are more manageable,” Geithner said in a transcript of an interview with CNBC television distributed by e-mail today. This shift is “the dominant trend that we see,” he said.
The remarks follow criticism from Chinese officials, including Vice Finance Minister Zhu Guangyao on Nov. 8, that the Fed plan to buy $600 billion of Treasuries may “shock” emerging markets by flooding them with short-term capital. German Finance Minister Wolfgang Schaeuble called the Fed “clueless” and Greenspan wrote in the Financial Times today that the U.S. is “pursuing a policy of currency weakening.”
I have enormous respect for Greenspan, had the privilege of working with him for a long period of years but that’s not an accurate description of either the Fed’s policies or our policies,” said Geithner, who arrived in South Korea today to join President Barack Obama in efforts to rally support for U.S. trade initiatives. “We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy.”

Wednesday, November 10, 2010

I Do Not Believe in Conspiracy Theories, "Black Helicopters" or the Easter Bunny

Interesting article by Martin Wolf today in the FT.  While I agree with his overall conclusion that QE will more likely prove ineffective than lethal, there is no guarantee of this outcome at all, particularly should the Fed move to QE3, QE4, etc as they may if QE2 proves "insufficient"...

I disagree with him on several basic assumptions:

1. "Underlying inflation has fallen close to 1%":

If you measure inflation based on what people actually consume (food, energy, health care....), then this assumption is obviously not correct.  I do not believe in conspiracy theories, "black helicopters" or the Easter Bunny, but please recall that there is a precedent, and some would argue a motive, for a government to report lower inflation statistics to reduce the real cost of debt service and transfer payments.

Recall that "volatile" components of food and energy were removed from the inflation index and the concept of  "core" inflation excluding these items was created in the 1970s as inflation spiked after the first oil repricing and the U.S. renunciation of gold convertability...the measure of "core" inflation provides the impression that there is no inflation when there actually is and allows the government to pay lower amounts on social security, etc keyed off this lower inflation rate.

2. "Expectations of inflation are well anchored" and "Boiled down, the criticisms of the Fed come dow to ... its policies are leading to hyperinflation"

Expectations can change - call me in a year after all this money printing and we shall see what inflation expectations are --- it is possible for the economy to be mired in recession with high inflation (again, look at the 1970s).

As for hyperinflation -- yes, we would need QE3, QE4, etc for that, however, the precedent being set by the Fed now certainly makes this possible although not probable because of Republican oversight in the House.  The very fact that it is possible is an enourmous change in policy....

3. "The Fed...has a dual mandate, to foster maximum employment and price stability"

I always thought "price stability" meant just that....when did "price stability" start meaning 2% inflation anyway?  With 2% inflation, over 10 years the value of your money decreases to about 80% of what it was and over 30 years it is halved...

Also, where is the research paper showing the causual link between inflation and employment ???  It simply does not exist.

4. Boiled down, the criticisms of the Fed come dow to two, the second of which is: " its policies...are beggar my neighbor, in consequence, if not intention", per the German finance minister Wolfgang Schuable:

The policy of a government printing money to buy its own government bonds is certainly an attempt to 'beggar my neighbor' as it will most likely lead to a depreciation in the dollar as a government cannot control both interest and foreign exchange rates, at least, not without capital controls...

What is underappreciated here is that a re-rating higher of U.S. soverign risk is an appropriate response, as holders of U.S. assets realize that the continued and capricious policy-making may continue, and that these decisions are being made by a small group of unelected officials with quite a bit of power and discretion....

Why would the money printing continue?  Well, what if unemployment does not decrase, or asset prices (the stock market?) decline, or any other dog ate my homework reason the Fed decides to come up with at one of there meetings or between meedings...

Who is to say, but the "Mandarins" at the Fed...or for that matter the Easter Bunny for all that ordinary people know about any of this...


[FT] Martin Wolf: The Fed is right to turn on the tap

Friday, November 5, 2010

If You Only Have a Hammer, Everything Looks Like a Nail (Maslow)

You decide if Jim Rogers is right:

"All [Ben Bernanke] understands is printing money....His whole intellectual career has been based on the study of printing money.  Give the guy a printing press, he's going to run it as fast as he can."

How did it come to this?  How could it be possible for someone steeped in the history of finance and economics to simply repeat mistakes having clear historical precedent...?

Nations have come and gone, but currency depreciation to fool the masses have been used since Nero's debasing of the denarius to feed the imperial Roman army, the German Weimar Republic's attempt to print its way out of debt to stave off communism, and of course more recently and less discussed, the Latin American inflations of the 1980s.  

Since moving off the gold standard in 1971, the U.S. dollar has lost over 80% of its purchasing power. (The BLS has an interesting calculator for this here  BLS Inflation Calculator).  The U.S. dollar is about to lose quite a lot more purchasing power...

The Bottom Line:  The Chairman is now, in part, targeting the stock price movements when making its decision of when and how much debt to monetize (ie, money to print) because he is the leader of the only Federal goverment agency supposidly able to act (see the surprising op-ed below)...

Invest - or - more accurately, protect whatever monetary assets you may have, accordingly.....

I disagree with the premise of much of what is written in the Chairman's op-ed so I will only highlight the new stock price targeting implied here...


From the Washington Post, by Ben Bernanke 
"What the Fed did and why: supporting the recovery and sustaining price stability"  exerpts below...

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. 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.

The Federal Reserve cannot solve all the economy's problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector. But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.

Text of Chairman Bernanke's Op-Ed

Wednesday, November 3, 2010

Buy the Rumor Sell the Fact

The Fed is not targeting the long end of the curve, hence the backup in rates…..

Once the latest positioning is over, the long asia short s&p trade is on again….

Next stop – Japanese central bank meeting coming up — see how much they decide to print in response....

Tuesday, November 2, 2010

Agcapita Update - ZIRP and the law of unintended consequences

Make your bets: if you think the Fed is out there to cap intermediate term bond rates, then you should be selling the dollar.....

from Stephen Johnston, Agcapita

Agcapita Update - ZIRP and the law of unintended consequences

It is axiomatic that central banks can control interest rates or exchange rates - not both.  As of late, they are falling over themselves to signal their willingness to sacrifice exchange rates.  Let there be no doubt on this point - central banks have an unblemished track record in only one area and that sadly is currency devaluation.  The US dollar has experienced a 97% loss in purchasing power since the inception of the Federal Reserve and the Canadian dollar a 95% loss since the inception of the Bank of Canada.

Official wisdom seems to be that a devaluation driven by enormous increases in the money supply is necessary for the US to grow out of its recession. Unfortunately, the US is pursuing this policy at the same time that the over 90 countries that run a current account surplus with the US are trying to maintain export competitiveness via their own fledgling devaluation programs.  ZIRP is a global phenomenon.

A new area of mercantilism and competitive currency devaluations is clearly upon us and the consequences will be a global loss of purchasing power.  US policy does beg the simple question - if people could be made wealthy by debasing the currency wouldn't the Argentineans and the Zimbabweans (fill in your favorite currency failure here) be the richest people on the planet?

Now to the unintended consequences.  We are witnessing something akin to a positive feedback loop in the global monetary system.  With each massive injection of freshly created money, the system becomes increasingly unstable.  The end result is that every effort to fix the problems with more of the same QE merely creates another larger problem, hydra like, elsewhere.  In turn, each new problem is attacked with a larger dose of fresh money and so on and so on... repeat until bankrupt or in stagflation.

This brings me to the main point of this letter - and I promise there is one.  ZIRP is effectively throwing pension plans and savers onto the bonfire of the banking system.  What I mean by this is that low interest rates have created a huge stealth subsidy that is being donated to the banking system. 

How are pension plans being effected you may ask?  The issue arises because a significant number of pensions assume annual returns in the range of 8% when they are planning how to meet their obligations.  As a large portion of pension portfolios are in fixed income securities that are now yielding a fraction of that number, these return assumptions are aggressive to put it mildly.   The longer ZIRP continues the worse the problem will become.  Ultimately, benefits will have to be reduced and/or large amounts of additional capital in the form of higher contributions will have to be collected.  Barring this pensions will go bankrupt.  

Just how serious is this funding shortfall problem?   A recent pair of US studies on municipal and state pension obligations by the Kellogg School of Management reveals the magnitude.  By performing independent calculations on governments' raw numbers, it was concluded that the unfunded obligations of municipal pensions were more than double the officially reported figures. By the municipalities' accounting, they had a total of $190 billion in unfunded obligations while the study put the actual amount at $383 billion.   But wait it gets much worse.  The second Kellogg study found a state-funding gap of $3.2 trillion - for a grand total at the municipal and state levels of around $3.5 trillion - more than the banking bail-out to date. 

Retirees who have been promised benefits are going to exert powerful political pressure to be paid in full. Unfortunately, it does not appear that there will be enough cash to pay them and stay solvent.  Once again, the federal government is likely to step in and bailout the pension system with more freshly printed money - QE 3 and 4 anyone?

Kind Regards

Stephen Johnston - Partner

Monday, November 1, 2010

The Cleverly Expressed Opposite of Any Generally Accepted Idea is Worth a Fortune to Somebody (F. Scott Fitzgerald)

The question on everyone's mind this morning is what will happen this week?  What of the election, the Fed, the economic statistics? 

In time we may look back and see that now was the time when the public began to appreciate the increased U.S. policy uncertainty and government instability... which argues for longer term caution in holding U.S. assets. 


from Ken Landon, J.P.Morgan Strategy, NY (Nov 1, 2010)


* EVENT RISK - This week headlines plenty of headline risk for the markets. To name a few: 1) US mid-term elections on Tue; 2) RBA policy decision on Tue; 3) FOMC announcement on Wed; 4) BoE & ECB policy decisions on Thu. Payrolls on Friday seem minor in comparison.

* FED - Expectations in the market likely are centered on the FOMC announcing $500 billion of UST purchases over the course of six months. That is the view of JPM and it is cited in the press as representing the median expectation of many economists. Like all FOMC statements, it will be crucial for the market reaction to see the way in which the Committee expresses its guidance for future policy. One key passage will include whether or not the Fed leaves open the door to future increases in debt monetization above the initial amount announced on Wed. In any case, you no doubt already know all of this because of repeated mentions in the press and, no doubt, every bank that sends out research. One thing that is clear to me: the Fed has significantly increased Policy Uncertainty in the eyes of investors and business decision-makers. Monetary policy is now a crap-shot when it comes to investing one's capital.

What is the Fed accomplishing by its widely-telegraph intent to print up more fiat paper cash and aggressively monetize UST debt? The central bank has significantly boosted market expectations of inflation while simultaneously lowering Real Rates.  Attached chart 10Y_BE.gif shows that the 10Y Inflation Breakeven priced in the bond market has risen sharply since August and is now above historic averages. At 2.17%, the 10Y Breakeven is above the 1998-2010 average of 2.0% and the 1998-2008 average of 2.06%. The same is true for the 5-year, 5-year forward Inflation Breakeven, which is currently 2.88% vs. the 1999-2010 average of 2.64%.

Chart SILVER.gif shows that the price of silver has risen to 30-year highs. Lumber is at the highest levels since May and copper is close to cyclical highs. The USD is weakening once again after it rebounded over the past two weeks when the market started to question its assumptions about the size and duration of the anticipated debt monetization of the Fed.

It is hard to predict how financial markets will react in the immediate aftermath of the FOMC meeting on Wed. It could turn out to be a classic "buy the rumor, sell the fact" situation, but the consolidation of the previous two weeks suggests that such unwinding already has occurred to some extent. If I were a betting man, then I would leave the casino right now and come back after the possible carnage. As mentioned above, monetary policy and its effect on the economy and the marekts has been reduced to a crap shoot. Uncertainty is unusually high. In this highly uncertain monetary environment, it is not a surprise that expectations are rising about future inflation. Such uncertainty will work against the USD. Capital will seek out more stable monetary environments in the newly emerged economies of the world. Capital will exit the newly submerging economies.

* ELECTION - The market likely is pricing in a Republican victory that gives the Party control of the House and a pick up of around seven seats in the Senate. The most likely outcome of such a configuration in Congress will be political gridlock. Business decision-makers may find gridlock preferable to the recent steamroller approach to ruling the nation. However, it is important to understand that legislative action will be required to avoid a very negative result for the economy in 2011. Specifically, if Congress does not pass a bill that the President is willing to sign, rates of income taxation will increase as of January 1st.

In that respect, a story in the Washington Post holds out hope that the current Congress may accomplish something of real value for the economy. Specifically, the Post reports:

"According to people familiar with talks at the White House and among senior Democrats on Capitol Hill, breaking apart the Bush administration tax cuts is now being discussed as a more realistic goal. That strategy calls for permanent extension of cuts that benefit families earning less than $250,000 a year, and temporary extension of cuts on income above that amount."

see http://tinyurl.com/23xklxn for full article

If Congress were to pass such an extension of the Bush tax cuts and if the White House were to sign it, then two things would have been accomplished: 1) Elimination of uncertainty about future taxes that now overhangs decision-making; and 2) Avoidance of growth-destroying tax hikes that would transfer valuable capital from productive individuals and businesses to the government.

Before ending today's comment, my scanning of the web indicates that people are finally starting to talk about the possible implications for Fed policy resulting from a possible Republican takeover of the House. Cutting right to the chase, ZeroHedge.com reports:

"The Fed will be hamstrung, as Ron Paul, a conservative standard-bearer and harsh critic of the Fed, will head the sub-committee overseeing its actions. Liquidity expansion or new programs will probably drop sharply under his watch."

see:  http://tinyurl.com/32tvvqb  for full report

To give an idea of the kind of testimonies that Chairman Bernanke may be subjected to under the tutelage of Ron Paul, consider the following exchange between the latter and former Chairman Greenspan during congressional testimony in 2004:

RON PAUL: "Maybe there is too much power in the hands of those who control monetary policy, the power to create the financial bubbles, the power to maybe bring the bubble about, the power to change the value of the stock market within minutes? That to me is just an ominous power and challenges the whole concept of freedom and liberty and sound money."

ALAN GREENSPAN. "Congressman, as I have said to you before, the problem you are alluding to is the conversion of a commodity standard to fiat money. We have statutorily gone onto a fiat money standard, and as a consequence of that it is inevitable that the authority, which is the producer of the money supply, will have inordinate power."

If the Republicans take the Hosue and if he sets the agenda in Sub-Committee, then Ron Paul will no doubt shine the spotlight on Mr. Bernanke as the Fed embarks on QE2. The potential for increased volatility in the financial markets will increase on Nov 2nd and when the new Congress convenes in January.

Saturday, October 30, 2010

How Did Argentina Lose Its Place Among the World's Top Economies?

It is generally well known that at the turn of the 20th century, Argentina was a prosperous country with one of the world's largest economies  (in the top 10), however, what exactly caused its demise into today's class warfare and poverty?


Question:  How did this occur?  Do we see similar themes occurring today in the U.S.?  Is this commentary accurate?


Argentina “was” one of the richest countries in the world until…(from randysright, link below)


In the early 20th century, Argentina was one of the richest countries in the world. While Great Britain’s maritime power and its far-flung empire had propelled it to a dominant position among the world’s industrialized nations, only the United States challenged Argentina for the position of the world’s second-most powerful economy.  


It was blessed with abundant agriculture, vast swaths of rich farmland laced with navigable rivers and an accessible port system. Its level of industrialization was higher than many European countries: railroads, automobiles and telephones were commonplace.  


In 1916, a new president was elected. HipĆ³lito Irigoyen had formed a party called The Radicals under the banner of “fundamental change” with an appeal to the middle class.  


Among Irigoyen’s changes: mandatory pension insurance, mandatory health insurance, and support for low-income housing construction to stimulate the economy. Put simply, the state assumed economic control of a vast swath of the country’s operations and began assessing new payroll taxes to fund its efforts.



For the rest please see....
http://randysright.wordpress.com/2010/03/25/argentina-was-one-of-the-richest-countries-in-the-world-until/



To find out for sure I am going to read this:
http://www.amazon.com/Argentina-Economic-Chronicle-richest-countries/dp/0979557607

Friday, October 29, 2010

Fed Asks for Help and Bank of Japan Moves Next Meeting

Does this send a message of confidence? Or does it simply illustrate that the Fed is "making it up as it goes along" as ex-vice chairman Blinder said last week. (Story below)
Fed Asks Dealers to Estimate Size of Debt Purchases:
What sort of message does this send the markets? 

Japanese central bank moved its next meeting:
Interesting to note that the Japanese central bank moved its next meeting to after the Fed meets presumably so as not to be blindsided by any unexpected Fed money printing....(http://www.marketwatch.com/story/bank-of-japan-holds-steady-moves-up-meeting-2010-10-28)


Fed Asks Dealers to Estimate Size of Debt Purchases

     Oct. 28 (Bloomberg) -- The Federal Reserve asked bond dealers and investors for projections of central bank asset purchases over the next six months, along with the likely effect on yields, as it seeks to gauge the possible impact of new efforts to spur growth.

     The New York Fed survey, obtained by Bloomberg News, asks about expectations for the initial size of any new program of debt purchases and the time over which it would be completed. It also asks firms how often they anticipate the Fed will re- evaluate the program, and to estimate its ultimate size.

     With their benchmark interest rate near zero, policy makers meet Nov. 2-3 to consider steps to boost an economy that’s growing too slowly to reduce unemployment near a 26-year high.
Financial-market participants are focusing on the size, timing and maturities of likely purchases aimed at lowering long-term rates, with estimates reaching $1 trillion or more.

     “If they buy too much, I think there’s a real chance that rates are going to rise because people are worried about inflation,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “If they don’t buy much, they’re not going to have a market impact.”

     William Dudley, president of the New York Fed and vice chairman of the Federal Open Market Committee, set expectations of about $500 billion for a new round of so-called quantitative easing, a figure he used in an Oct. 1 speech.

                        Investor Concern

     “What the market wants to hear is that the Fed is going to buy $1 trillion” of Treasuries, said Joseph Lavorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.
“Concerns that it might be less is causing investors to worry about how deep and broad this program is going to be.”

     Treasuries rose for the first time in seven days today, pushing the yield on the benchmark 10-year note down two basis points, or 0.02 percentage point, to 2.698 percent as of 10:38 a.m. in London. The yield climbed to the highest in more than a month yesterday on speculation that the Fed will buy less debt than some traders had been expecting.

     Europe’s Stoxx 600 Index increased 0.7 percent today and Standard & Poor’s 500 Index futures rose 0.3 percent.

     The New York Fed’s survey coincides with a Treasury Department questionnaire asking dealers about the outlook for bond-market liquidity. Treasury officials say any additional program of asset purchases by the Fed won’t affect borrowing plans.

                      Avoiding Disruption

     Treasury officials say they want to avoid any disruption to the $8.5 trillion market in U.S. government debt, the world’s most liquid, as the Fed weighs restarting large-scale asset purchases. The Treasury also doesn’t want to give any impression to investors, particularly those based overseas, that it might be coordinating with the Fed to finance the national debt.

     “Treasury debt-management decisions are designed to deliver the lowest cost of borrowing over time and are entirely independent from monetary-policy decisions made by the Federal Reserve,” Mary Miller, assistant secretary for financial markets, said in an e-mail to Bloomberg News yesterday. Before joining the Treasury last year, Miller was head of global fixed- income portfolio management at T. Rowe Price Group Inc. in Baltimore.

     The Treasury is scheduled to hold its quarterly meetings with bond dealers tomorrow, ahead of the department’s Nov. 3 refunding announcement.

                        Treasury Yields

     The New York Fed surveyed primary dealers required to bid in U.S. debt auctions. It asked dealers to estimate changes in nominal and real 10-year Treasury yields “if the purchases were announced and completed over a six-month period.” The amounts dealers can choose from are zero, $250 billion, $500 billion and
$1 trillion.

     Deborah Kilroe, a spokeswoman for the New York Fed, declined to comment.

     “Yields would have to back up” if the market is overestimating the size of Fed purchases, said Joseph Abate, money-market strategist at Barclays Capital Inc. in New York.
“The dealer community is running much less leverage than they did before. The amounts of inventory they are financing is smaller. Their capacity to absorb extra supply is lower.”

     The Treasury is watching for signs the Fed’s buying program might affect market operations. Fed purchases would take place as the Treasury reduces debt issuance, raising questions of whether the government would have to sell additional securities to avoid market disruptions.

                        ‘Nuclear Option’

     “That’s certainly kind of a nuclear option for Treasury,”
Stanley said. “They would always and everywhere like to avoid that.”

     Extra debt sales have happened just twice in the past decade, with so-called snap reopenings of existing securities in the aftermath of the Sept. 11, 2001, terrorist attacks and at the height of the financial crisis, in October 2008. The Treasury acted to shore up market liquidity and prevent a trading freeze caused by shortages of highly sought securities.

     The Treasury has put a premium on selling its debt in a regular and predictable fashion. Those efforts may be tested by the Fed’s purchase campaign, which would take place in the secondary market rather than at Treasury auctions.
     The Fed’s purchases might run as high as $100 billion a month, some analysts say -- almost equaling the entire amount the government is likely to sell.

                      ‘Tugging’ the Wheel

     “If the Fed commits itself to buying back the bulk of the Treasury’s net new issuance through open-market purchases, it will have more than one hand tugging on the wheel of federal debt management policy,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

     Crandall said the frequency of note auctions, combined with low interest rates, “sharply increases the likelihood of accidental reopenings in the next phase of the rate cycle.”

     The Fed is unlikely to buy up the entire supply of new securities, although it may adjust its internal guidelines of how much it can hold of any given issue. The Fed limits itself to owning no more than 35 percent of any specific security it holds in its System Open Market Account, or SOMA.

     “Our Treasury strategists point out it could also cause pricing distortions along the curve, if, for example, the Fed continues to target a 40 percent purchase concentration in the 6-10 year maturity bucket, as it has in its recent purchases,”
analysts at JPMorgan Chase & Co., including Alex Roever, wrote in an Oct. 22 research report. The report predicts the Fed will buy about $250 billion a quarter during the easing campaign.

     The central bank makes the securities in its portfolio available to dealers through its daily securities lending operation, making it unlikely that Fed purchases alone would lead to an acute shortage of a given issue.

     For now, the Treasury is doing everything it can to show borrowing independence. The department is extending the average maturity of its debt and ramping up sales of 10-year and 30-year securities while cutting issuance of the medium-term securities the Fed is more likely to buy.